Financial Times Editorial - China's trade surplus spells trouble ahead

Financial Times Editorial - China's trade surplus spells trouble ahead
Copyright The Financial Times Limited 2007
Published: January 12 2007 02:00 | Last updated: January 12 2007 02:00



The 74 per cent rise in China's trade surplus last year should be setting off alarm bells in Beijing. They are already ringing in Washington, where members of both parties in the new Congress are reviving proposals aimed at forcing a revaluation of the renminbi. China should be concerned, not just because of the threat of worsening trade conflict with the US, but because the ballooning surplus is causing problems for its own economy.

Congress's fixation with the China "threat" and, in particular, with the level of the renminbi is seriously misplaced. Even a substantial appreciation of the currency would have little impact on the US trade deficit. On average, less than one-third of the value-added in China's exports is estimated to be local, so any loss to their competitiveness would be largely offset by a reduction in the price of imported industrial inputs. In so far as China's exports suffered at all, the main beneficiaries would be producers in even lower-cost locations, not in the US. Until the US stops spending more than it saves, its external deficit will remain.

The most powerful reason for China to allow its currency to rise is that doing so would be in its own economic interests. The market intervention needed to hold the renminbi down boosts domestic liquidity, fuelling asset price bubbles and greatly complicating the task of economic management. It also diverts into low-yielding foreign exchange reserves - chiefly of dollars - capital that could be used better and more profitably at home. For a country as poor as China thus to bankrollthe world's richest economy makesno sense.

Although the renminbi has edged up against the dollar since Beijing officially severed the link between the two 18 months ago, its effective exchange rate has scarcely budged. An artificially low exchange rate acts as a tax on Chinese consumers, cutting their purchasing power by raising import prices. That frustrates Beijing's stated goal of rebalancing growth by expanding domestic consumption and reducing dependence on exports. But a more flexible currency alone will not be enough to rectify China's economic imbalances. Firm action is needed to tackle their underlying cause: the country's persistently high savings rate, which exceeds even its huge investment levels. There is a strong case, too, for a fiscal stimulus to promote domestic consumption growth.

However, Beijing's moves towards those goals remain halting and timid. There are growing signs of bureaucratic paralysis, as the approach of November's national party Congress induces risk-aversion among senior policymakers eager for promotion. The result is to delay still further necessary economic measures that will, at best, take some time to work through. Meanwhile, China's trade surplus looks set to continue increasing this year. Although export growth has slowed, import growth has tailed off much more sharply. Lower oil prices are one reason. However, the trend appears also to reflect a longer-term structural shift, as industries in China produce steadily more parts and assemblies that were previously imported.

It increasingly looks as though political alignments in Beijing and Washington are set on a collision course. It is in both sides' interest to change direction. Unless they see sense and do so soon, things could turn really ugly. The impact would be felt not just on relations between the two countries, but by the global economy as a whole.