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Shrinking China Trade Surplus May Buttress Wen Rebuff of Pressure on Yuan
China’s trade surplus may narrow to an eight-year low in 2012 as slowing external demand undermines exports, a shift that may help the nation rebuff overseas criticism for maintaining an undervalued exchange rate.
Bank of America Corp., Credit Agricole CIB and Haitong Securities Co. estimate the surplus (CNFRBAL$) this year will slip below $102 billion in 2005. For December, the excess shrank to $8.8 billion, according to the median of 20 estimates in a Bloomberg News survey (CNFRBAL$), indicating an annual surplus of $147.2 billion.
The latest monthly figures are due tomorrow, before the arrival in Beijing of U.S. Treasury Secretary Timothy F. Geithner, who said last year that China’s yuan hadn’t risen fast enough. With a prolonged crisis in Europe, the biggest Chinese trading partner, Premier Wen Jiabao may have little appetite to accommodate Geithner’s request, analysts said.
“The dollar-yuan exchange rate could be quite close to the equilibrium value and the room for further rapid yuan appreciation is limited” given a shrinking trade surplus, said Lu Ting, an economist at Bank of America in Hong Kong. “As China comes close to a balance of trade, political pressures from the U.S. will have to cool eventually.”
The yuan weakened 0.08 percent to 6.3146 per dollar as of 4:30 p.m. in Shanghai, retreating further from a high last month, when it surpassed 6.3 for the first time in 18 years. It will gain 2.4 percent to 6.14 yuan per dollar by the end of this year, compared with a 4.7 percent increase last year, according to the median estimate of 28 analysts in a Bloomberg News survey.
A diminishing surplus may damp liquidity growth, giving China’s central bank more scope to cut banks’ required reserve ratio. People’s Bank of China Governor Zhou Xiaochuan said yesterday the nation must be ready to combat possible global economic shocks. JPMorgan Chase & Co. sees a further cut in the reserve ratio as soon as this week.
China’s December lending and money supply growth exceeded economists’ estimates, signaling monetary conditions may be easing, data showed yesterday. New loans totaled 640.5 billion yuan ($101 billion) for the month, exceeding the estimates of all 18 economists surveyed by Bloomberg. M2, a measure of money supply, rose 13.6 percent, compared with the 12.9 percent median of 18 estimates.
The PBOC lowered the reserve ratio for the first time in almost three years in December to encourage lending. Expectations for more monetary easing escalated after inflation cooled to the slowest pace in 14 months in November and industrial output growth weakened.
Economic growth may slow to 8.5 percent this year, down from 9.2 percent in 2011, according to the median estimate of economists in a Bloomberg News survey. Hitachi Construction Machinery Co., Japan’s second-largest heavy-equipment maker, said last month that Chinese demand for excavators will decline in the first half of 2012 as the government prolongs a crackdown on property speculation.
China’s exchange-rate management has seen it accumulate the world’s largest currency reserves, with holdings at $3.2 trillion as of September. As the trade surplus fell and inflows of overseas capital diminished, gains in the reserves moderated. Quarterly growth slowed for four straight quarters through September, according to data compiled by Bloomberg.
“With the gradual stabilization of foreign-exchange reserves and close to zero current-account surpluses, China will have more arguments to oppose Washington’s demand on currency appreciation,” said Herve Lievore, an economist for Asia at AXA Investment Managers in Hong Kong.
China’s import growth outpaced that of exports every month since May as Europe’s turmoil hit. Estimates for December signal a 19 percent drop in the trade surplus last year from 2010. Commerce Minister Chen Deming said Jan. 5 the excess probably dipped 13 percent to $160 billion, or 2 percent of gross domestic product.
The U.S. Treasury said last month it will seek further gains in the yuan and called the currency undervalued, while declining to brand China a manipulator of its exchange rate. Geithner’s visit this week is part of a trip that also features a stop in Tokyo, with talks scheduled to include discussions on sanctions on Iran for its nuclear development plans.
Share of GDP
Hu Yifan, chief economist at Haitong in Hong Kong, who previously worked at the World Bank, sees the annual trade surplus in a range of $70 billion to $100 billion. Credit Agricole’s Dariusz Kowalczyk predicts the excess at $60 billion. China’s merchandise surplus as a share of GDP rose to a record of 7.5 percent in 2007, when the surplus hit $262.2 billion.
“Given the European debt crisis and sharp slowdown of the European economy, China’s decline in its trade surplus will likely be faster than expected,” said Ma Jun, an economist at Deutsche Bank AG, who rated as top China analyst and Asia economist by Institutional Investor magazine’s 2011 poll. Ma said the surplus may shrink to zero by 2015.
A shrinking labor force and rapid aging of the population in a nation of 1.3 billion people will also reduce China’s surplus, Ma said. Such demographic changes will account for about 60 percent of the drop in the excess in the coming decade, Ma said in his 2011 book “Locus of Money,” based on the assumption that yuan will rise 3 percent annually against the dollar.
Not all economists are predicting a shift to balanced trade. BNP Paribas SA senior China economist Ken Peng, the most accurate forecaster of Chinese economic data in Bloomberg News surveys in 2011, said “China would still have a structural trade surplus, just because of the amount of migrant people employed in the exports industry.”
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