Analysts vary on whether China needs to appreciate yuan faster

BEIJING - China's trade surplus with the United States hit a four-month high in June, a jump analyst said may add pressure to the over appreciation of the yuan.

Trade between China and the US grew by 11 percent year-on-year to $36.9 billion in June. But China's trade surplus with the US grew by 8 percent from a year earlier to $19.1 billion, according to the General Administration of Customs.

Exports to the US surged 9.76 percent from a year earlier to $28 billion last month, while imports from the US grew by 14 percent to $8.9 billion.

China's overall imports rose 19.3 percent, from a year earlier, to $139.7 billion, the weakest since November 2009.

China's overall exports rose 17.9 percent and despite this being the smallest increase since last December they reached a record high of $161.9 billion.

The decline in import growth has led to a widening trade surplus, $22.3 billion in June compared to $13.1 billion in May. But in the first six months the trade surplus dropped 18 percent, year-on-year, to $44.9 billion.

"China's exports to the US in June remained stable. But the nation's demand of the US goods such as manufacturing equipment, high value-added and agricultural products, is weaker than expected," said Lai Pingyao, a professor of economics at the University of International Business and Economics in Beijing.

Lai said declining global commodity prices and decreasing domestic demand were main factors for consecutive slowdown of US exports to China, which indicates China's demand on foreign crude oil, iron ore, rare metals and agricultural products have significantly dropped in the past two months.

"Tightening policies, slowdown of economic growth in coastal provinces and increasing production of domestic rare metal resources all have lessened the nation's dependence upon international commodities," Lai said.

China has imported 334 million tons of iron ore and 126 million tons of crude oil from international markets in the first half of this year, given the fact that Chinese manufacturers have already stocked a large number of raw materials to secure their productions for foreign orders.

Zhang Qizuo, an economics professor at Chengdu University in Southwest China's Sichuan province, said China should speed up the yuan's appreciation to tame soaring global prices to help reduce the cost of imports for US goods, relieve imported inflation pressure and optimize its economic structure.

"The US will take the trade deficit as an issue in a bid to increase its exports to China," Zhang said. "In the second half of this year, the US might prepare for another round of talks to urge Beijing to further appreciate its currency."

But other scholars think it is unnecessary to appreciate the yuan.

"Although the yuan's appreciation would effectively cut import prices, this might draw more inflows of international capital by sending signals that the Chinese yuan's appreciation would be stable," said Liu Yuanchun, deputy head of the School of Economics of the Beijing-based Renmin University of China.

In comparison with China, the interest rates in the US are relatively low. The yuan's appreciation could cause more foreign capital seeking a higher monetary yield.

Liu said a significant currency appreciation could squeeze export revenues by pushing up prices and fueling inflation, which could also affect China's export growth.

The People's Bank of China, China's central bank, is aware of those negative outcomes of hot money inflow, adding liquidity to the financial system and potential asset bubbles, which can severely damage the nation's trade growth.

Currently, the yuan is allowed to rise or fall by 0.5 percent from the central parity rate each trading day in China's foreign exchange spot market.

The central parity rate of the yuan against the US dollar is based on a weighted average of prices before the opening of the market each business day.

Shen Guobing, an economics professor at Fudan University in Shanghai, said exports from China's labor-intensive sectors are gradually losing competitive advantages because labor costs are rising and the yuan continues to rise against the US dollar.

"Along with falling energy and commodities prices, especially grains in recent months, imported inflationary pressure is easing in China. Reducing domestic inflation should be treated as the government's top priority right now. It is not a suitable time to discuss the appreciation of the yuan," Shen said.

Pushed by food prices, China's inflation escalated to the highest level in three years amid lingering pressure, with the consumer price index, the main gauge of inflation, jumping 6.4 percent year-on-year in June, according to the National Bureau of Statistics.

"Although the wider trade surplus with the US may cause trade disputes in the second half of this year, the appreciation of the yuan will be carefully considered by the government, as the nation needs to protect its own job market and financial interests," Shen said.