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China’s April trade surplus will cause problems with the US

China recorded a trade surplus of $11.4bn or £7bn in April. This was from a surplus of only $140m in March but was about four times greater than analysts had been expecting.

Why does this pose a problem for the US? It is because many Americans believe that the Chinese currency, the yuan, is undervalued. An undervalued currency means that Chinese exporters can sell at a highly competitive price in foreign markets. Many claim that it is an ‘unfair’ price.

Will China allow its currency to appreciate further?

In fact, Chinese exports grew 29.9% in April, compared to a year earlier. At the same time import growth slowed somewhat to 21.8% on the previous year. China has allowed its currency to rise in value by 5% since June last year, when it made certain promises to the US.

However, most Americans will feel that it is not rising fast enough. The evidence for this is in the fact that over the past year the Chinese trade surplus with the US has risen by 52% to $15.1bn.

A high level Chinese delegation is currently involved in trade talks in Washington, and yesterday, US Treasury Secretary Timothy Geithner said that China was making progress “towards a more flexible exchange rate”.

One factor which might back this up is the level of inflation which the Chinese are battling with at the moment. The latest figure of 5.4% in March was up from 4.9% in February, and was the highest level since July 2008. At the same time, the Producer Price Index rose by 7.3%.

The Chinese population are facing higher food prices which rose by 11.7% in April on the same month last year and a faster appreciation of their currency will reduce import prices. This means the Chinese government has to keep a balance between allowing growth which is strong, but not too strong, as they don’t wish inflation to get out of hand. So, a continuing, steady, upward revaluation of the yuan is a likely scenario.

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Posted in China, International Trade, US economy

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