China's trade surplus was $23.9 billion in September, less than August’s $25.0 billion but a lot more than last September’s $15.3 billion.In fact it was the fourth largest monthly trade surplus ever (June’s was the largest, with July and August close behind).The trade surplus year to date is $185.7 billion, handily beating 2006’s full year’s surplus of $177.5 billion, which at the time seemed like an extraordinary number – and we haven’t hit the busy end of year months yet.So far we are 69% higher than we were at this time last year.A straight-line projection suggests that the total trade surplus for 2007 is likely to come in at $300 billion for the year.
According to an article in Friday’s FT, Zhang Yansheng, a director at the Institute of International Economic Research in Beijing, said he expected China’s trade surplus to keep growing for the foreseeable future. But he argued that the exchange rate was not the solution to the imbalance. “The yuan is not the answer to solve the problem because exporters in China are not so sensitive to prices,” said Zhang, whose think-tank is affiliated to the National Development and Reform Commission, the main economic planning agency. Similarly, in today's FT, Richard McGregor writes that "Few economists believe that a stronger renminbi will transform bilateral trade relations with Beijing, as China’s export growth reflects in part its repositioning as the last point of assembly for Asian goods shipped overseas."
I think McGregor is right to note that many economists agree that the currency level is not directly the cause of the trade surplus, but I think Mr. Zhang's statement is a bit disingenuous. If moving the yuan will not hurt China’s export sector, then why put up with the huge domestic imbalance in money supply?Like most policy-makers Zhang seems to misunderstand the relationship between the currency level and the trade surplus.
The currency regime is at the root of the exploding trade surplus not because of its direct impact on relative pricing but because of its impact on monetary policy (or the complete lack thereof). Raising the value of the yuan might not directly affect export competitiveness as much as people hope or fear (I think it might have some noticeable impact on exports, but I accept that trade experts have a far better grasp of this than I do), but if raising the value of the yuan encourages imports and slows down capital inflows (or even reverses them), China's monetary policy will not be so incredibly expansionary and Chinese industrial production will moderate, so reducing the prssure for export expansion.
By the way exports were up 22.8% year on year whereas imports were up only 16.1%.Surely this might have something to do with the declining yuan versus the euro, no? According to today's FT, year-to-date exports to the EU were up 37% and to the US they were up 16%
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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October, 2007
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