China Current Account Surplus

The China current account surplus is down roughly forty percent from last year. The US would like to see this shrink even further as America constantly runs a deficit due to more imports from China than exports to China. The US argument is that the China current account surplus is because of an artificially low exchange rate on the Chinese currency, the Yuan. The US and the EU would both like to see the Chinese allow their currency to float freely versus other currencies in order to make US and EU exports more competitive in the Chinese market and elsewhere. The Chinese, however, are merely following the example set years ago by Japan and Taiwan. By constantly purchasing US dollars to use as foreign currency reserves these nations are able to force the dollar higher and their own currency lower in currency pair trading. As the specter of a Greek debt default occupies the attention of the Forex world Western leaders are looking to the future and one of the reasons for the degree of debt in Europe, the China current account surplus.

In recent discussions as well as in pronouncements in the media, Chinese leaders cite the reduced China current account surplus as evidence that China is investing more heavily on infrastructure as a means of driving its currently export driven economy. They state that China is moving at a reasonable speed in increasing the value of its currency and that moving any faster is not necessary. On the other hand world leaders like US president Obama make the argument that China needs to let its currency float and do it more rapidly. With the US and EU debt burdens on the front burner for the West it is understandable that these economies look for relief in the form of more nearly balanced foreign trade with China and other Asian nations. Meanwhile China states its intention for internationization of the Yuan. The goal of China is, by the end of the decade, to add the Yuan to the small of group of currencies that nations hold as foreign currency reserves.

Currently the dollar as a safe haven currency is rising due to the EU debt crisis and pronouncements out of Europe that nations can voluntarily leave the European Union. This could well mean the entire southern tier of nations, Greece, Italy, Spain, and Portugal whose sovereign debt issues have occupied currency traders for over a year. If the Chinese are successful in internationalizing the Yuan it could become a so called safe haven currency along with the Yen, Swiss franc, US dollar, and, in better times, the Euro. Much of this will depend upon continuing a China current account surplus but not to the degree that the US and EU engage in a trade war as a means of last resort in order to deal with their own debt crises. The bottom line for China is to move to a more balanced economy in which their citizens buy products from around the world as well as being the new workshop of the world and only being an export driven economy. Many experts feel that the planned economy approach that China is using to create jobs in the interior does not solve the balanced economy issue and simply continues an eventually unsustainable China current account surplus.