China’s Trade Deficit Hampers Free-Floating Yuan

About: China’s new trade deficit, booming Chinese economy, Chinese Customs Administration, China’s president, Hu Jintao, Jim Trippon, China’s equity markets, Chinese Yuan, China’s soaring imports, China’s economic expansion

China posted a March trade deficit of $7.2 billion, news that may downright shocking to some market observers. The deficit represents China’s first since 2004 and the news throws a wrench in the plans of Washington’s political chattering class to get China to let Yuan appreciate. The pervasive belief has been that the trade surpluses we’re so accustomed to seeing from China fuel the argument for Yuan appreciation. Without those surpluses, Beijing isn’t about to remove the Yuan from its peg to the U.S. dollar.

Not surprisingly, the March deficit can be attributed in large part to China’s soaring imports of raw materials, namely oil. China, the largest auto market in the world and the second-largest energy consumer, said its oil imports soared 29% in March. Given the pace of China’s economic expansion, its need for commodities and raw materials isn’t likely to abate soon and that may mean a few more months of trade deficits are on the way. That means it is extremely unlikely Beijing lets the Yuan appreciate.

Trade deficits equal lower account surpluses and lower account surpluses diminish the chances of a rising Yuan. For its part, China believes the March deficit is a temporary phenomenon and that talk may assuage those that fret over an artificially lower Yuan. Economists surveyed by Bloomberg News say China’s economy probably grew by 11.7% in the first quarter, the most rapid clip since September 2007. With growth like that, there remains little incentive for China to let the Yuan rise.