On paper, the case for a revaluation of the Chinese Yuan seems rock
solid: China’s forex reserves have swollen to $800 Billion, its annual
trade surplus exceeds $100 Billion, and its exports have soared.
However, delve deeper into the figures, and a vastly different picture
emerges. First, the country’s forex reserves are largely the result of
‘hot money,’ inflows of foreign capital hoping to instantaneously
capitalize on a Yuan revaluation, rather than long term investment in
capital projects. In addition, China’s trade surplus is increasingly a
story of slowing imports, rather than growing exports. As investment in
fixed capacity has
declined, so has the demand for equipment and
machinery, much of which is imported. In addition, while China’s trade
surplus with the US exceeded $200 Billion in 2005, China runs a deficit
with most other countries it trades with. The Economist reports:
So the balancing act, for the [Chinese] authorities, is
to keep up the expectation of a revaluation through talk and an exchange
rate that crawls up fractionally—by another percent or two here or
there.
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