China May Let Yuan Appreciate Despite First Trade Deficit in Six Years

China's imports pushed higher in March, which may cause the Asian economic powerhouse to post its first trade deficit in six years.  But even though the deficit bolsters its argument for keeping the yuan pegged to the dollar, it appears Beijing will let its currency appreciate in the near future.

Rising commodity prices probably led imports to outpace exports by $390 million in March after a $7.6 billion trade surplus the previous month, according to the median estimate in a Bloomberg News survey of 26 economists.

Nevertheless, a change in China's currency policy is "imminent", and may occur in the next few weeks, Ben Simpfendorfer, a Hong Kong- based economist at Royal Bank of Scotland Group Plc (NYSE ADR: RBS), said Friday on Bloomberg Television.

China has kept its currency, the yuan, pegged around 6.83 per dollar since July 2008 in order to boost exports during the deepest contraction in trade since World War II. Despite the currency freeze, exports still tumbled for 13 straight months, shrinking the nation's trade surplus by 34% last year to $196 billion.

Of course, the United States' trade gap with China still ballooned to $227 billion last year leading American lawmakers to call for action to rein in what they perceive to be China's unfair trade practices.

The Obama administration wants to reduce the trade deficit because it hampers the U.S. economy by sending money abroad rather than keeping it at home.  Narrowing the deficit could boost gross domestic product (GDP) and encourage job creation.

However, some analysts say a stable yuan and China's $586 billion (4 trillion yuan) fiscal stimulus have contributed to the global recovery.

"China has done a lot in terms of restructuring global imbalances," Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs Group Inc. (NYSE: GS) in Hong Kong, told Bloomberg.

Any impact from yuan appreciation will be "dwarfed by the swings in the trade balance driven by domestic demand in China and the U.S.," said Buchanan, who previously worked at the International Monetary Fund (IMF).

U.S. Treasury Secretary Timothy F. Geithner's meeting in Beijing Thursday with Chinese Vice Premier Wang Qishan produced no breakthroughs on China's currency policy, but a U.S. official told The Wall Street Journal that the yuan was discussed.

The official, who wished to remain anonymous, said the meeting was "constructive" and that the U.S. is encouraged that China will take action on its exchange rate, but that the talks produced no new commitment from China, The Journal reported.

U.S. officials don't expect Beijing to make specific promises to the United States, given the Chinese leadership's determination to not be seen as bowing to U.S. pressure on the currency issue, the official said.

Economists and officials with contacts inside the Chinese government say they believe the leadership is increasingly close to making a decision to let the yuan appreciate, but that any loosening will be gradual in nature.

China may announce a revised policy within days with a small, one-time jump in the yuan, which would then be allowed to trade in a greater range against the dollar, the New York Times reported last week, citing unidentified people with knowledge of an emerging consensus on the issue.

The shift would likely be similar to the revaluation China engineered in July 2005, when the yuan was allowed to rise 2.1% overnight.

On Thursday, Xia Bin, a prominent Chinese scholar recently named an outside adviser to the People's Bank of China, told reporters in Shanghai that the current de facto peg is no longer necessary because "the worst of the crisis is over."

But he argued that a large move in the currency's value would be unwise, and suggested a return to the pre-crisis policy of a somewhat flexible but closely managed exchange rate.

"There won't be much benefit if the renminbi appreciates suddenly and sharply," Mr. Xia said, using the Chinese currency's official name.

Goldman Sachs predicts the government will announce in coming weeks a widening of the 0.5% band in which the yuan is allowed to fluctuate against the dollar.

News & Related Story Links: