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Trade deficit points to evidence of yuan at fair value?

Presidential hopeful Mitt Romney has already made clear his own approach to US policy on the renminbi. On the first day of a Romney presidency, China would be declared a “currency manipulator” – one of the strongest terms available to policymaking lexicon.

If Romney does get the top job, the Chinese will be ready to counter such allegations. Indeed, they are already suggesting that claims that the renminbi is undervalued no longer hold up under scrutiny.

Their evidence? Officials have been pointing to the most recent trade data. In February, China posted a $31.5 billion trade deficit, its largest in more than a decade.

“This trade deficit is a positive sign that the renminbi exchange rate is close to its equilibrium level,” Yi Gang, deputy governor of the People’s Bank of China, said at the National People’s Congress, reports the Financial Times.

The Chinese New Year celebrations make February a volatile month for capturing economic data. To get a more accurate picture, it helps to look at January and February combined. And in the first two months of 2012, there was a $4.2 billion trade deficit, still nearly five times the deficit recorded during over same period last year.

The figures led HSBC to concur that the “renminbi is closer to equilibrium value than ever before”.

“This structural change in China’s balance of payments has profound implications for the currency,” HSBC continues. In particular, policymaking emphasis will start to shift away from measures allowing the currency to appreciate, towards efforts to liberalise the currency regime in general and create a more flexible trading environment.

The trend towards equilibrium (or ‘fair value’ for the renminbi) also suggests a bigger role for market mechanisms: “generally speaking, as the renminbi exchange rate gets closer to the equilibrium point the market supply and demand should take a greater role,” said Zhou Xiaochuan, governor of the central bank.

The renminbi is up about 24% against the US dollar since 2005, rising 5% last year. Many now expect its appreciation to slow. So far this year, the renminbi has stayed pretty flat, having earlier this month had its weakest run against the dollar since 2010, reports the Financial Times.

Nonetheless, HSBC is still predicting that the renminbi will appreciate by 3% against the dollar in 2012, although the forecast is based partly on expectations that the dollar itself is going to weaken.

Is Romney going to take much notice of the ‘equilibrium’ debate? He’s rather busy out on the campaign trail at the moment, of course. But he might point to the fact that China has run monthly trade deficits before (and that it ran a surplus over full year 2011). Also, the numbers show China in occasional deficit on a global basis. In its trading relationship with the US, China always shows a surplus, giving Romney plenty of tub to thump if he needs to.


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