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Big trade surplus not good for China

Big trade surplus not good for China
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First Published: Thu, Apr 05 2007. 02 02 AM IST
Updated: Thu, Apr 05 2007. 02 02 AM IST
By V. Ramakrishnan, Reuters
MUMBAI: A large trade surplus is not good for China’s sustainable development but the exchange rate is “just one side” contributing to it, China’s deputy central bank governor said on Wednesday.
Wu Xiaoling told reporters on a trip to India that China had to take steps to curtail the increasing surplus, and measures could include improving domestic demand and investment overseas by Chinese companies.
“I think too much trade surplus is not good for China’s sustainable development,” Wu told reporters after giving a speech at a banking conference.
“So in the future we have to take measures to curtail the increase in the large trade surplus.”
The comments come just days after the US said it was slapping anti-subsidy duties on imports of glossy paper from China, taking up a new weapon to oppose what it says are unfair Chinese trade practices.
The move reflects anger in the US over its record trade deficit with China, which touched $233 billion last year.
But analysts said they did not think the duty case itself would trigger fresh moves by Beijing to trim the surplus.
“I don’t see much difference between this and the previous statements,” said Jun Ma, chief China economist at Deutsche Bank in Hong Kong, in reference to Wu’s comments.
Instead, Ma said China would probably press on with existing efforts, like cutting tax rebates on exports and allowing the currency to appreciate over time.
More flexible Yuan
China’s trade surplus reached a record $205.2 billion in February on a rolling 12-month basis.
It uncoupled the yuan from a dollar peg in July 2005 and allowed it to float within managed bands. Since then it has appreciated about 5 percent and China says it is gradually letting it move more freely.
But many US lawmakers and manufacturers still believe the currency is undervalued, giving Chinese companies an unfair price advantage in international trade.
Wu said she knew the exchange rate was an important factor affecting the trade surplus.
“But you know it’s just one side of this factor,” she said.
“The exchange rate has become much more flexible, and the fundamental role of supply and demand enhanced.”
The yuan is freely convertible for trade and direct investment but not for unrelated financial purposes. Wu said China would further relax capital controls to relieve some of the “heavy pressure” on its balance of payments.
“Restrictions on cross-border capital transactions will be relaxed step by step on a selective basis,” she said in her speech.
Full capital account convertibility is a long-standing government aim, and last year Beijing permitted selected financial institutions to invest money in overseas bond markets. Wu said outward investment channels would be broadened.
She listed other steps Beijing was taking to ease the rise in its balance of payment surplus and said that while China had made progress in its economic and financial development, it still faced tremendous challenges.
Banks still played too big a role in the financial system, the securities and insurance sectors were relatively underdeveloped and financial institutions in general needed to improve their competitiveness and risk management.
“As a major developing economy, our financial market is neither broad nor deep enough,” she said.
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First Published: Thu, Apr 05 2007. 02 02 AM IST
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