China's Collapsing Trade Surplus Is Killing Any Chance For A Yuan Revaluation

In case you missed it, China’s trade surplus collapsed 64% in January as import growth far outpaced that of exports.

Such data may be one reason that Chinese Commerce Ministry Yao Jian reaffirmed China’s yuan-dollar peg at a news conference today.

He lambasted American politicians for blaming far too many American economic problems on the yuan peg, saying that “The yuan’s exchange rate is not the main reason triggering China’s trade surplus, America’s trade deficit or global economic imbalances.”

Yet more importantly, he highlighted one of the biggest reasons why China could suddenly turn gun-shy when it comes to any yuan revaluation.

It would be hard enough for China to push major yuan revaluation in a situation where such a move would merely reduce its trade surplus and hurt weaker exporters at the fringe… but should January’s trade surplus contraction continue to the point that it went negative into a trade deficit, then the U.S. can forget about pushing for yuan revaluation even if China is able to maintain a surplus with the U.S. alone.

CNBC: “Many exporters are still struggling for survival, so I think a stable exchange rate for the yuan will remain a prime target of China’s current economic policies,” Yao said.

“China’s trade surplus is going to narrow further this year and we cannot rule out a possible trade deficit in some months,” he said.

If China experiences, or even expects, an overall trade deficit in the relatively near future with its current yuan-dollar rate, then arguments about the yuan being unfairly valued will no longer carry much weight. Regardless of whether or not they are true. So if you’re betting for a yuan hike, hope the dollar doesn’t get too strong, since the stronger it gets, the stronger the yuan gets relative to other nations, and thus the cheaper other nations’ products become in China, which increases the potential for a Chinese trade deficit.

Read about China’s latest trade release here >

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