Tuesday, 13 September 2005

China's exports rise in August but inflation slows

China's exports continue to rise and feed its trade surplus.

China's trade surplus more than doubled in August from a year earlier to hit about 10 billion dollars, the government reported. The trade surplus last month was 10.04 billion dollars, a rise of 122 percent from August 2004, the commerce ministry said on its website, citing customs authorities.

Exports in August rose 32.1 percent from a year earlier to 67.8 billion dollars, while imports were up 23.4 percent to 57.8 billion dollars, according to the statistics.

With surpluses like this, Brad Setser thinks that "the PBoC's reserves will continue to rise rapidly".

Because the exchange rate is so far (in my judgment) from equilibrium now, absent continued government intervention, it could rise even if China's economy slows. That is the price China could pay for resisting the natural tendency of the RMB to rise amid its (huge) boom over the past couple of years.

That said, China's slowing inflation rate makes it less clear that a substantial rise in the RMB is called for.

China's consumer inflation rate slowed in August, with prices rising just 1.3 percent from a year earlier compared with an increase of 1.8 percent in July, official data showed Monday... CPI rose 2.1 percent for the first eight months of this year, compared with 2.2 percent for the first seven months, 4.0 percent for the same period last year and 3.9 percent for all of 2004, the data showed.

Meanwhile, the IMF yesterday released its latest assessment on China. The IMF stressed the importance of "appropriate policy responses and continued implementation of structural reform". These included steps to drain more of the excess liquidity out of the banking system, granting the People's Bank of China more discretion over interest rate policy, and greater exchange rate flexibility.


brad said...

from a domestic equilibrium standpoint, slower inflation reduces the case for RMB appreciation (tho controlling the retail price of gas artificially keeps inflation down, i suspect -- and same may be true with other forms of energy). from an external adjustment standpoint, high levels of inflation are one way of generating a real exchange rate appreciation, so with lower levels of inflation than the US, the RMB is depreciating v. the USA so long as the RMB/ $ stays roughly constant. So in that sense, the less inflation, the stronger the case for RMB appreciation. McKinnon's preferred mechanism of adjustment (higher inflation in china than in the US) is not happening

lim said...


Agreed. But there is a "preferred" mechanism, and then there is a "likely" one.

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