YUAN I SHOULD BUY SOME MORE STUFF FROM YOU?

3/8/11

This morning’s (i.e., Tuesday, 3/8’s, page A9) Wall Street Journal reports that China is seeking to reduce its trade surplus but does not plan to do so by allowing the yuan to appreciate. Rather, China plans to lower tariffs across the board but to be especially aggressive in reducing duties on goods imported from developing countries. The National People’s Congress also emphasized that it would like to increase imports from the U.S. in order to rebalance unilateral trade with the world’s largest economy. Whether China will be able to get its people to import more from the United States is questionable; Chinese consumers and, especially, Chinese businesses seem to have a decided preference for German goods. Perhaps the Chinese rulers will have to flex their authoritarian muscles a bit more than usual to achieve this alteration of the people’s mindset, but I digress.

China’s efforts to reduce its trade surplus but its refusal to do by allowing the yuan (or renminbi, depending on, I suppose, what day it is) to appreciate confirms a point I made in my 6/21/10 post LOOK WHO’S PULLING THE RICKSHAW NOW. The Chinese authorities’ extreme reluctance to let the yuan appreciate has little to do with its trade balance and almost everything to do with its enormous stock of dollar denominated assets, $1.16 trillion dollars in U.S. treasuries alone at last count. In other words, China’s steadfast defense of the yuan arises from a concern about its balance sheet rather than its income statement.