Despite measures to arrest exports, trade outflows from China once again exceeded expectations at 40.6% above the previous month and net USD 14.6 billion with exports up 22.6% or USD 80.3 billion and imports up 19.7% at USD 65.7 billion. In the first 7 months of this year, China has reported a cumulative trade surplus of $75.9 up 51.9% from the same period last year.
The uncontrolled trade surpluses are straining relations with many nations especially the US which has been demanding a revaluation of its currency Yuan.
The Yuan gets a free ride on the US Dollar and Beijing has only once increased the valuation. An upward valuation of Yuan will make its goods more expensive and restrain exports but also bring inflation and losses to vast millions of below poverty population in the rural areas. Chinese trade surplus with the US hit a record-high USD 202 billion in 2005 making it higher than China’s global trade surplus.
Despite several measures to slow growth to avoid overheating, the Chinese economy saw a sharp increase at 11.3% growth in the 2nd quarter, the faster rate in a decade. China is trying to keep the overall growth high to address serious poverty in rural areas while trying to reduce excessive investment in factories and other assets leveraged by heavy bank loans. High-level meetings in recent weeks have been looking at ways other than interest rate hikes, tightened lending rules, and ban of construction of some types of luxury villas to stop this unhealthy trend. Chinese policy makers are also worrying about the excessive reliance of exports as means for growth and instead are encouraging domestic consumption.
Most of the Chinese economy runs on
Foreign Direct Investment (FDI) while domestic earnings, savings, consumption, and investment is low. Most of Indian growth is financed by Foreign Institutional Investors (FII) and domestic savings and consumption. What China needs is a bit of what India has and vice-versa. Unfortunately, while the Chinese Government is trying to change their position, India has not really grasped its predicament and any efforts to address the issue have been stopped by parochial allies.