Currency Manipulation Tops G20 Agenda, As China’s Trade Surplus Soars

| About: WisdomTree Chinese (CYB)

By Martin Denholm

Talk about bad timing…

Just as the G20 summit gets underway in South Korea – a conference aimed at enhancing global economic partnerships and increasing cooperation between nations – China is the guest that people wish hadn’t shown up.

Just as leaders like President Obama and Britain’s David Cameron were busy talking up the idea of working together and straightening out global trade imbalances, China announced that its trade surplus ballooned to $27.1 billion in October. It was a massive 60% surge over September’s figures and its second-highest figure of 2010, as exports vaulted to $135.9 billion – up 22.9% from October 2009.

The reason?

A Yuan-Fueled Trade Powerhouse

Of course, we all know that China is a production powerhouse, but the perceived manipulation of its yuan currency is a constant thorn in the side of Western nations. Both U.S. and European manufacturers and exporters are struggling to keep up with the cheap and prolific Chinese juggernaut and powder-puff yuan. The U.S. trade deficit with China now stands at $27.8 billion.

In fact, some believe the yuan is undervalued by as much as 40% against the U.S. dollar, which has again prompted calls for tariffs to be levied on Chinese imports. In September, the U.S. House of Representatives passed a bill that would impose tariffs on imported Chinese goods, but it has yet to go through the Senate.

In addition, Treasury Secretary Timothy Geithner said in October that countries should set targets to help them guard against bloated current account or trade imbalances.

But in a typical G20-style show of “solidarity,” both Japan and Germany nixed the idea. And China isn’t backing down either, with President Hu Jintao defiantly stating that countries should focus on sorting out their own problems, rather than obsessing over China.

In fact, China joined many others in criticizing the Federal Reserve’s decision last week to pump another $600 billion into the U.S. economy. It argues that the stimulus move actually heightens the chances of a “war” over currency manipulation, as it will devalue the dollar and boost exports. A Chinese credit rating agency went a step further and downgraded the United States because its “quantitative easing” through buying long-term Treasury bonds weakens its credit standing.

“With Great Power Comes Great Responsibility”

For his part, David Cameron attempted to reach out to China, stating that while its fat trade imbalance poses a threat to other global economies, its growth should be viewed as an “opportunity, not a threat.”

However, he cautioned against allowing the trend to get out of control. Quoted on the BBC, he said: “We need a more balanced pattern of global demand and supply, a more balanced pattern of global saving and investment.” And he channeled Spiderman when he continued by saying that China’s increased power brings more responsibility, too.

In reply, China is trying to play innocent and convince the West of two things:

  • First, that it’s not to blame for the current trade imbalances.
  • And second, that it’s not so reliant on exports, as it’s also stimulating the domestic economy.

Hmm… sure. That’s like the United States trying to suggest that it’s frugal with its finances!

But China also knows that the G20 is reluctant to engage in an all-out war over currency manipulation (or, to put it in the G20′s more flowery language, “more market-determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies.”)

So what will this round of the G20 talks achieve? A lot of talking, but probably not much in the way of actually redressing the balance (or, more appropriately, imbalance), so expect the status quo to reign.

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