Trade surplus may defy orthodox currency cure
(Reuters)
Updated: 2006-08-04 11:07
What if China heeded U.S. advice and jacked up the yuan but its trade surplus
failed to shrink?
Some economists are coming around to the view --
increasingly expressed in Beijing -- that the structure of China's trade makes
the surplus largely immune to the classical prescription of a stronger exchange
rate.
So while a rise in the yuan, or renminbi, would help China to
rebalance its economy and soak up excess liquidity, it might make scant
difference in the short run to a surplus that tripled in 2005 to $102 billion
and has risen another 55 percent so far this year.
"The impact of the
yuan on trade is overstated," said Glenn Maguire, Asia economist for French bank
Societe Generale.
"There's a growing recognition by central banks across
Asia that foreign trade isn't as sensitive to movements in foreign exchange
rates as it was just 3 or 4 years ago," Maguire said.
The explanation
for the shift: globalisation.
So much manufacturing capacity has moved
to China that foreign-owned firms now account for 51 percent of China's trade
surplus, up from 3 percent in 2000, according to Lehman Brothers.
A
typical multinational company exporting consumer electronics from China
assembles its products from chips, components and casings imported from across
Asia that would all become cheaper if the yuan were revalued.
Relatively
little value is added in China, so a leap in the yuan would lead to just a small
rise in the dollar price of labour and other fixed local costs.
"Thus, a
large renminbi revaluation might not dent its trade surplus much: any loss of
export competitiveness could be partly overcome by passing on the cheaper cost
of imported inputs," Lehman economists Rob Subbaraman and Mingchun Sun said in a
note.
NOT WHAT THE TEXTBOOKS SAY
Stephen Green,
senior economist with Standard Chartered Bank in Shanghai, goes further,
illustrating in a hypothetical example of trade in laptops that a 20 percent
yuan revaluation would actually increase China's processed trade surplus by 11.6
percent.
"In other words, in the processed sector, yuan appreciation has
exactly the opposite reaction to what the theory predicts," he said in a
research note.
Green makes a number of assumptions, including that a 1
percent yuan rise reduces the volume of Chinese goods sold in rich-country
markets by 1 percent; that processing firms can defend their dollar margins; and
that other Asian currencies do not appreciate in tandem with the yuan against
the dollar.
This last assumption, he admits, is unreasonable. But even a
simultaneous 35 percent jump in the yuan and other Asian currencies would cut
China's processing trade surplus -- in Green's laptop example -- by just 5.3
percent.
That would be far too small to be meaningful as processing
trade had a surplus last year of $143 billion, Green said.
By contrast,
China's "real" trade sector ran a deficit -- as would be expected of a
developing country -- of $40.4 billion, reducing the overall surplus to a bit
more than $102 billion.
"Real" trade refers to conventional importing
and exporting by domestic firms.
"We think there is a good case for
believing that yuan appreciation could exacerbate the surplus in the short term
and maybe that short term could last 1-2 years," Green said.
"Appreciation will only have a significant impact upon China's trade
surplus if it induces manufacturing, both processing and 'real', to move
offshore -- and this relies upon alternative locations becoming competitive.
China's imbalances are going to get worse before they get better," he said.
Subbaraman and Sun at Lehman said appreciation of the yuan might not
have much impact, but it was still desirable.
"It would lessen the
chances of protectionism against China, which would hurt China's exports (and
imports), and the overall economy. It would also help to equilibrate capital
flows, giving the central bank more room to raise interest rates without
attracting 'hot money' inflows," they wrote.
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