China has served up an eye-catching statistic: a trade deficit of $7.2bn in March, the first monthly shortfall since 2004. But this won’t temper US pressure on China to revalue the yuan, says Dong Tao of Credit Suisse. “Political considerations on Capitol Hill” will ensure that the issue won’t go away.
US legislators say pegging the yuan to the dollar gives the world’s biggest exporter an unfair trade advantage, causing a US trade deficit and costing US jobs. Last week the row, which could lead to a trade war, was partially defused after the US delayed publishing a report that was expected to call China a “currency manipulator” and China signalled that it would soon revalue the yuan.
But this is more likely to delay further argument than prevent it altogether. Not only is there strong anti-China momentum in Congress, but the March trade deficit “is likely to be a temporary phenomenon”, says Goldman Sachs. Exports tend to be seasonally weak in spring in any case and exporters often “suspend production for an extended period” after the New Year celebrations. The surplus that “matters most politically”, the one with America, has barely fallen over the past year, says Capital Economics.
A Bloomberg survey shows analysts expect a 3.1% rise in the yuan by the end of the year. China may take it off its peg by the end of the quarter now that the economy looks robust, says Zhao Qingming of China Construction Bank. A stronger yuan would keep a lid on inflation by cutting import prices, although the authorities will be wary of a large revaluation that could hamper the export recovery.
A small revaluation won’t make much of a dent in the trade surplus with America, but then neither did the 21% rise in the yuan against the dollar between 2005 and mid-2008. That shows that “the labour-intensive parts of the manufacturing base that have been lost … are never coming back” in the US, says Mark Vitner of Wells Fargo. A small price rise in Chinese goods isn’t going to spur
manufacturers to restart production in America. Ultimately, the fact that the US has a trade deficit with 90 countries shows that it consumes too much and doesn’t save enough, says Stephen Roach in the FT. But that’s not something China-bashing US politicians will be telling voters any time soon.