China Trade Surplus Reignites Tensions Over the Yuan Currency Manipulation

By: Money_Morning

Don Mille writes: China in August posted its third straight trade surplus of more than $20 billion, putting friction with the United States over the nation's currency back in the spotlight.

Exports rose 34.4% in August and imports climbed a greater-than-expected 35.2%, leaving the country with a $20.03 billion surplus, a customs bureau report showed Friday.

But a sustained trade gap with the United States could embolden American lawmakers who are pushing to penalize China for what they consider unfair trade practices.

"Strong export growth and high trade surpluses weaken the argument that China cannot cope with currency appreciation," Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong told Bloomberg News. August imports "point to solid domestic demand," he also said.

The debate over China's currency is nothing new. U.S. policymakers have long asserted that Beijing deliberately keeps the yuan undervalued to boost its exports and give its manufacturers an unfair advantage. After re-pegging its currency to the dollar in 2008, China earlier this year attempted to placate its critics by ending the peg and allowing yuan to modestly appreciate.

However, the currency hasn't moved fast enough for many U.S. policymakers. It's risen less than 1% against the dollar since June 19, when Beijing announced it would end the peg.

Even still, the yuan has managed to reach a new high against the greenback, as the People's Bank of China (BOC) set the currency's daily fixing at 6.7625 to the dollar Friday morning - its highest level since the central bank began publishing the daily fixing in 1994.

Some analysts think Friday's move could mark the beginning of another spell of yuan appreciation against the dollar ahead of U.S. elections that could make Congress more likely to push trade legislation targeting China's currency policy.

"We expect the Chinese to respond to growing U.S. pressure with another round of discrete and limited renminbi appreciation," Eurasia Group analysts Sean West and Nicholas Consonery wrote in a report this week.

Still, it remains unlikely that the BOC, which has said large moves in the currency are out of the question, would do enough to satisfy its Washington critics.

"It's important for China to let the market play a greater role in setting the exchange rate," Treasury Secretary Timothy F. Geithner said in an interview with Bloomberg Television. "We'd like to see them move more quickly."

China's trade surplus in August actually shrank from July as imports picked up, but it was still the second-highest monthly surplus of the year. And most economists think the gap will widen again in the months ahead as a slowing economy drags on China's demand for imports.

The House Ways and Means Committee is scheduled to discuss next week whether China has made "material progress" on the issue and debate what action Congress and the administration should take to address the nation's exchange-rate policy.

However, Morgan Stanley Asia Chairman Stephen Roach said in an interview with Bloomberg that it would be a "huge mistake" for the U.S. to enact trade restrictions on China over the yuan, because too much pressure could spark retaliation in the form of China selling U.S. Treasuries.

China's holdings of long-term Treasuries fell by $21.2 billion in June to $839.7 billion, a U.S. government report showed recently. Total Chinese investment in U.S. debt declined 2.8% to $843.7 billion, the smallest in a year, following a 3.6% slide in May.

"With the yuan appreciating very slowly and U.S. mid-term elections drawing near, it's inevitable that Sino-U.S. tension will heat up again," Ken Peng, a Beijing-based economist at Citigroup Inc. (NYSE: C), told Bloomberg. "Chinese officials may face confrontations over the yuan" at meetings of the International Monetary Fund (IMF) and the Group of 20 nations (G20) in coming months, he added.

Money Morning/The Money Map Report

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