Yuan - US$ dispute....continued

Following on from my Blog of 16 February, there is new news on the US-China dispute on revaluing the Chinese Yuan. In March, China posted its first trade deficit for six years: $7.2bn (£4.7bn). And the US Administration has postponed its decision (originally due this month) on whether it would treat China as a "currency manipulator" or not - much to the chagrin of many US Congress members. The March deficit has been very timely from China's point of view (I expect we'll see a large April trade surplus). China says it wants neither a trade surplus or deficit and the March figures undermine the US's attempts to blame its economic woes on currency manipulation by China. In 2008-09 the US had trade deficits with over 90 countries. The US is simply not as competitive on the manufacturing front as they were and the political pressure in the US is hot as jobs are being lost. The bald demand is to re-slice the currency price pie in the US's favour by making China's exports more expensive and US exports cheaper. Currency re-slicing does not address the crisis in US savings nor address the structural requirement for the US to create new economic value, reduce domestic consumption, pay higher taxes and increase savings.

A recent article in the China Daily by Stephen S. Roach, Chairman of Morgan Stanley, says that the demand for revaluation of the Yuan by US economists is premised on "bad economics" and they should know better. Martin Wolf regularly addresses the issue in his FT column and stridently opposes Roach's view and also accuses Jim O'Neill, chief economist of Goldman Sachs* as being "ahead of himself" for arguing that the Chinese surplus is ceasing to be a significant factor. Seems to me that Wolf is losing the argument for China to be labelled as a "currency manipulator".

China is working hard to stimulate domestic demand as one route to address the trade imbalance - but this is going to take time. The US sound petulant in their demands to get their hands on China's savings to prop up their debt-ridden economy at a time when their own "net national savings rate" has fallen to -2.5 per cent of national income. Why should China do this?! US-China trade only represents 12 per cent of total Chinese trade with the rest of the world.

I expect China will allow its currency to appreciate but at its own controlled pace and in a way that not only preserves stability of its own economy but in a way that avoids the kind of knee-jerk economic reactions that have characterised western monetary practice in recent years.

* Martin Wolf, "Evaluating the renmiminbi manipulation", Financial Times, 7 April 2010.