China Hawks Back in Business?

money.jpgIt sure seems so as the Chinese trade surplus hit another record shown by the data for June released earlier this week.

(From the FT - Important parts marked with bold) 

'China’s trade surplus hit $14.5bn in June, another record, renewing pressure for a speedier revaluation of its currency and the further opening of its market to foreign companies and services.

The rapid ascent of the surplus, which totalled $61.5bn for the first half of the year, a 55 per cent advance on the same period in 2005, has been fuelled by strong export growth and substantial import substitution in key industries.

The political debate over the surplus, already the source of significant tension in relations with the US and Europe, is likely to be exacerbated by a backlash in China over foreign purchase of local companies.'

Pushing for a revaluation ...

'The continued rebuff of foreign takeovers in China, partly a Chinese response to problems its own companies have experienced in the US, threatens to put the issue alongside the trade surplus in Washington.

The US has pressed hard in the last two years for China to revalue its currency in the belief that more expensive Chinese exports and cheaper foreign imports would bring down the surpluses.

Hank Paulson, the incoming US Treasury secretary, signalled in a recent confirmation hearing that he would push for greater reform and the opening of China’s financial sector as well as a more flexible currency.'

But this is also important about capital flows and control.

'The revaluation of the renminbi is also seen as the key to weaning the Chinese economy off excessive reliance on investment for growth, by reducing capital inflows and the build-up of liquidity in the financial system, which feeds back into capital spending.

Investment in exporting industries in China is growing much faster than spending in the service sector and utilities, according to the World Bank.'

Now this was my coverage of this but if you want more I can highly recommend Dave Altig and his latest round-up of the China Buzz. For example he Includes some very interesting input about the long run effect of capital controls.

'I have noted before that, abstracting from capital controls, theory would predict an undervalued currency is a problem that should eventually take care of itself.  The reason is that pegging the nominal exchange rate -- the only currency price a central bank can hope to influence in the long run -- requires flooding the world with your domestic currency.  Given enough time, the inflationary consequences of those policies will cause the fundamental value of the nominal exchange rate to fall on its own.'

The comments section on Dave's post also contribute positively to this.