China's Surplus

You've probably noticed that the Chinese economy is booming. More and more Western companies are outsourcing to China. There is a record amount of young people coming to China to learn the language, eager to do business in Asia. 

Though this all sounds very good for the Chinese economy, economic growth at a breakneck pace can have drawbacks. This article will give information on the Chinese trade surplus and the pressure from abroad to re-evaluate the Yuan.

Performance of the Chinese Economy in 2006

The Chinese economy had a record in 2006 with the fastest-rising GDP in 11 years. The National Bureau of Statistics (NBS) announced earlier this month that the GDP grew by 10.7 percent to reach 20.94 trillion Yuan ($2.68 trillion). The inflation rose moderated by 1.5 percent. It is predicted that this year measures the Chinese economy will rise by another 15 per cent to 2 trillion USD this year.

China’s foreign trade volume reached 1.76 trillion U.S. dollars in 2006. The trade volume between China and the European Union rose by 25.3 percent to hit US$272.3 billion last year, as announced by the Chinese Ministry of Commerce.

China has a huge trade surplus that rose 74 percent last year to $177.5 billion. According to Xie Fuzhan, head of the National Bureau of Statistics, this trade surplus is a reflection of China's increasing competitiveness. This is also an indication that China has a very high saving rate and low consumer expenditure.

Xie also said that the high surplus is because of the rise in foreign investment in China. Chinese income tax is different for domestic and foreign companies. Domestic companies now pay a 33 percent income tax, while foreign companies pay an average of 15 percent. This might not be the case in the future; a new law has already drafted been by the Chinese government to unify income tax, and the new regulation may take effect next year.

Reducing the Surplus

Because of the high saving rate and low consumer expenditure the Chinese government will have to boost expenditure.

Effects of China's Trade Surplus

One of the top priorities of the Chinese government this year will be the reduction of the trade surplus. The Chinese government will focus this year on importation instead of exportation. Taxes on imports have already been lowered to encourage Chinese companies.

It is important for the stability of both the global and Chinese market that China controls its surplus. China’s money supply has grown significantly in the last year primarily due to the trade surplus; these big flows of money make it harder for banks to control investment and inflation. The surplus adds to China’s foreign exchange reserve, which has contributed to rapid investment growth by adding to the money available for banks to lend out.

The big trade surplus China has with the U.S could lead to a global recession. A collapse in the ability of the United States to finance the shortfall could drive interest rates higher and block growth in the world's largest economy, economists have said.

The surging trade surplus has increased friction with trading partners. In this case the pressure of other governments on China’s revaluation of its currency is more a political than an economic matter. For the U.S and other countries that have a big trade deficit with China, the solution is clear: If China would revaluate its currency their trade deficit will reduce. Another benefit is that their domestic inflation will decrease as well.

China revaluated its currency slightly last summer. Some argue that it might be good for China to revaluate its currency because the revaluation of the Yuan can help the Chinese economy because the export will slow down, and China will have more control over its balance of payments. The reasons against the revaluation are that the Yuan will slow down China’s economy and the investment would also decrease in China. An Appreciation of the RMB would involve a major change in China's international monetary policy and have important consequences for growth and stability in China and the stability of Asia.

In general, the view in Asia is not to revaluate the Yuan while trading partners of China want an appreciation.