Reports have it that China’s Trade Surplus contracted sharply from $13 billion in December 2010 to $6.5 billion in January 2011 prompting some questions in connection with the country’s Trade Surplus sustainability. The question that needs to be asked is whether the revaluation of the Yuan has had any impact on its Trade Surplus providing a justification for more pressure by United States and the rest of the world.
According to the reports stronger than expected imports contributed immensely to the drop in the Trade Surplus. Additionally, the country saw a rise in inflation in January 2011 of 4.9% from 4.6% in December 2010. Perhaps a contributing factor to this inflation is the increased domestic demand against a limited supply. In fact it is not good that the Chinese economy is seeing inflation rate of this magnitude at this time of the year. This is because based on projections inflation potentially rises in the second half of the year and so it is my view that the country may face more inflation in the second half of the year if economic policies are not enacted to cool the bubbling economy.
Apparently, these developments may suggest the Chinese economy is facing a supply problem (shortage) with increasing demand. The supply problem may not only be with processed goods but also raw materials for industries. A major supply issue may have to do with oil supply for industrial activities. The rise in material costs internationally including oil prices are all issues that can have a degenerating effect on the export horizon of the country besides having the potential to erode gradually the surplus the country has accumulated over the years. Also, escalating prices can remotely or subtly increase its export prices somehow diminishing its global competitive edge. In fact, the unrest in the Middle East as it continues can escalate China export prices as the country is a major consumer of oil.
Unfortunately, current developments do point to the perpetuation of the unrest and its spread to major oil producers in the region. In the event of that happening oil prices will continue to rise. We have seen the effect the Libya demonstrations has on the oil prices even though Libya the 15th. Oil producer in the world produces about 1.5 million barrels per day amounting to 2% of the world’s supply.
A partial remedy to slowing down the oil price hike may be provided should the U.S pursue its plan of opening up its strategic oil reserves to boost supply and plunge prices. In spite of that the Chinese government must continue to scrupulously tighten its monetary policy and other financial policies including but not limited to interest rate hikes, maintaining pragmatic policies so as to circumvently cushion the debilitating effect of rising oil price on its economy. Any action plan that can prevent an “economic bubble burst” of its resilient industrial economy should be the objective now for the Chinese government. Policies that will equip the industrial sector with “economic buffers” to nullify high oil price impact are a must.
Let us not forget that any bubble burst will spread to other parts of the world as we now have an integrated world economic system. Put in a funny way if major economies like that of China or the U.S sneezes, the rest of the world catches a cold. The bubble burst of the American economy began in its housing sector and rippled into other sectors of the economy and subsequently to the rest of the world. So if there is a sector China has to watch and to prevent a bubble burst initiation then it has to be the housing sector.
Again based on these developments critics of the Yuan depreciation can make a case here that if China continues to revalue the currency then it is likely its exports surge will not be sustainable in the long-term and other countries like the U.S and EU can narrow the trade gap. Unfortunately, the currency Armageddon may be heading for the defining moment as China recently said the Yuan appreciation level is O.K in that it has allowed the market to determine the Yuan value as demanded. In fact a top economist from China asserts that the current exchange rate system being applied which is the “managed floating system” is the best China can offer and should be embraced by the international community. Let’s talk a little about the dynamics of this exchange rate system.
The ”managed floating system” lies between the fixed and floating rate exchange systems. That means in spite of the currency being allowed to float on a daily basis, the Chinese government (China Central Bank) may sometimes be compelled to intervene to prevent the Yuan from moving to far in a particular direction. In that case the currency can be manipulated to benefit the country at the expense of other countries. The currency can be manipulated also to prevent it from becoming a convertible currency consequently abating a highly floating currency. This means the currency Armageddon will not curtail as parties on the offence will not yield to any of these reformations until the impact is felt significantly in their economies.
Now, continuing the analysis from the first part of this article, six factors were propounded categorically as being the driving force behind the current currency Armageddon taking place between United States, EU and China. The six factors were further dichotomized as capitulating developments and extrinsic austerity measures. In the next section of this article the extrinsic austerity measures which can produce a dampening effect on the Yuan devaluation will be the talking point. Three factors will be considered in this compendium namely high taxes, international coalition and diplomatic persuasion.
High Taxes or Tariffs
The U.S. may be compelled to impose high taxes or tariff (practically about 25-30%) on imports from China but it must be understood here that this action has a “backfiring effect” of causing loss of jobs (estimated to be about 48,000 jobs) in the U.S. Because of the integrated nature of the global economy, a job created in China is a job lost in the United States and vice versa. Also China’s GDP or economic growth is largely dependent on exports (net export) and fixed investments. So any restriction on imports to the United States can hurt its economy since the Chinese economy is dependent more on exports than domestic demand. Also the U.S is one of the major trading partners of China and the largest market for its products. However, this action plan of import restrictions may not be sustainable since China has established bigger markets in Asia and Africa for its products. In fact, the uncertainty surrounding the cause and effect of this action is huge and it is very important that much thought is given to it before implementation.
Again, history shows that China revalued it currency in response to growing criticism in the past but the country’s avenues for trade has changed with regards to the pervasiveness of its market. So it will be much difficult for the aforementioned plan to have the expected impact on the Chinese economy. Also an austerity measure such as the tariff or quota may be an infringement on free trade or international business because it gives unfair advantage to the businesses which operate in the U.S. Ultimately, it will cause the Chinese government to look for more trade treaties with countries that are ready to pact with them. Already China has several trade treaties with removal of tariff and may be compelled to pursue more if the austerity measures of high taxes or tariff are applied. An alternative will be perhaps for the U.S. to intentionally buy more of the Yuan so as to cause its appreciation. However, this may not be a judicious plan since it is not an easily convertible currency.
Above all with Europe’s debt crisis worsening, it is indisputable that some of the reserves of China are tied up in the EU and more wealth loss is possible. With the reserves tied up in major economies such as U.S. and EU, any significant economic weakening in China will result in global loss of wealth and regeneration of the global financial crisis.
International Coalition
The U.S. can continue to rally other countries, international organizations such as IMF, World Bank to press for effective revaluation of the Yuan at G-20 meetings and alike until the move produces an improvement in the Trade imbalance of all these countries. Unfortunately, the G-20 meetings have always been a blame game with no better results. So far China has been able to weather the storm with regards to the allegations made against the Yuan at these meetings. Also some countries and international organizations are gradually accepting the status quo of China to keep its strategies of maintaining the trade lead. Countries such as Russia, Brazil, India and Japan appears to be withdrawn on this issue and this is suggestive of support for China’s leadership in trade and its currency level fluctuations. With regards to Africa, more economic channels and businesses have open up with China so it will be very difficult to get their attention and support. Indeed, China has established a strong rapport with the continent through the deals which may be difficult to surmount. China also sees such rallying and incursion by an international coalition as a threat against its national sovereignty or inalienable rights and may not succumb to that.
Diplomatic Persuasion
The relations between China and the United States is gradually improving as we saw President Hu Jintao visit United States and a state dinner was performed in his honor. In fact China knows that it cannot do without the U.S considering the immensity of the financial transactions or assets amalgamating these two countries. China may agitate for the replacement of the dollar as the world reserve currency yet it knows that its economy is not isolated and that it is tied to that of the United States. So it is imperative that the U.S continues with persuasions as relation has improved and positive developments in the Trade imbalance may result in future.
China may want to keep some of its strategies that has produced the current formidable economy. It is hoped that with time inherent or natural economic forces will leverage the Trade imbalance discrepancies if the international community does nothing. Ultimately, time will show positive measurable results in the Trade imbalance of countries suffering from the Yuan currency devaluation. However, if the world decides to embark on a dialogue then it should be a diplomatic one. The diplomatic dialogue would have to go beyond the currency revaluation issue producing a broad-based dialogue that will address pervasively global financial and economic discrepancy issues at stake. The broad based dialogue should seek to address not only the trade imbalance issue but also the global financial problems or what may be termed “financial entropy” affecting the economies of the world. Meanwhile, countries involved in this dialogue should exercise restrain whilst working mutually with China towards leveraging global trade imbalances and forestalling future financial meltdown of the Chinese economy. For there are other factors besides currency incongruity that are controlling the global trade imbalance.
Conclusion
The currency Armageddon is set to continue and the trade imbalance stalemate unabated. Capitulating developments and austerity measures (high taxes or tariffs, international coalition and diplomatic) may not suffice in the short term as parties involved are relentless in their strategies for domination or leverage. Each government wants to increase its export because more exports results in higher level of production, income and most importantly generation of jobs. The World may be compelled to live with it and accept the status quo as it waits for the economic forces to cool the Chinese bubbling economy and produce leverage in Trade imbalance in the long term. The international community has two options: That is to press ahead with risky austerity measures or do nothing and allow natural economic forces to level the trade playing field in the long term.
References: TradingEconomics.com
Author: Charles Horace Ampong
Website: http://www.charliepee.blogspot.com/
1 comments:
Clear, concise, and probably accurate, seen from five months later
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