April 9 (Bloomberg) -- China may post its first trade deficit in six years after a surge in imports of commodities and consumer goods, weakening U.S. arguments that the nation is keeping its currency undervalued to gain an advantage.
U.S. Treasury Secretary Timothy F. Geithner met in Beijing yesterday with Chinese Vice Premier Wang Qishan amid rising pressure from American lawmakers for action to rein in a U.S. trade gap with China that was $227 billion last year. Premier Wen Jiabao’s government has said a stable yuan and its 4 trillion yuan ($586 billion) fiscal stimulus has contributed to the global recovery.
“China has done a lot in terms of restructuring global imbalances,” said Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs Group Inc. in Hong Kong, who previously worked at the International Monetary Fund. Any impact from yuan appreciation will be “dwarfed by the swings in the trade balance driven by domestic demand in China and the U.S.,” he said.
Yuan forwards declined 0.1 percent to 6.6228 per dollar as of 11:11 a.m. in Hong Kong, suggesting that the Chinese currency may appreciate about 3 percent over the next year.
Export Damage
China has kept the yuan pegged around 6.83 per dollar since July 2008, seeking to aid exporters during the deepest contraction in trade since World War II. Exports still tumbled for 13 straight months, shrinking the nation’s trade surplus by 34 percent last year to $196 billion.
The damage has left policy makers reluctant to rush to remove emergency measures even as growth accelerates and a record credit boom threatens to spark a property bubble. Central bank Governor Zhou Xiaochuan said in a March 23 interview that officials want to ensure the world isn’t in a “W-shaped recovery,” with a slowdown coming after the current rebound.
Geithner’s visit yesterday, and his delay last week of the U.S. Treasury’s decision on whether to label China a currency manipulator in a biannual report, have boosted speculation policy makers will end the dollar peg.
‘Imminent’ Policy Change
A change in China’s currency policy is “imminent” and may occur over the next few weeks, Ben Simpfendorfer, a Hong Kong- based economist at Royal Bank of Scotland Group Plc, said today on Bloomberg Television. Former U.S. Treasury Undersecretary Timothy Adams said in a separate interview that the nation may move “fairly soon” to allow appreciation against the dollar.
China may announce a revised policy within days with a small, one-time jump in the yuan, which would then be allowed to trade in a greater range against the dollar, the New York Times reported yesterday, citing unidentified people with knowledge of an emerging consensus on the issue.
The model for the shift would be the revaluation in July 2005, when the yuan was allowed to rise 2.1 percent overnight.
Goldman Sachs predicts the government will announce in coming weeks a widening of the 0.5 percent band in which the yuan is allowed to fluctuate against the dollar.
Buchanan said that setting the yuan against a basket of currencies weighted for the amount of trade China does with major economies would offer authorities greater flexibility and reduce the risk of traders making a “one way bet” on appreciation in the yuan against the dollar.
Commodity Costs
China’s exports probably rose 26.9 percent in March from a year earlier, after expanding 45.7 percent in the previous month, according to Bloomberg survey of economists. Imports may have grown 55.7 percent, compared with a gain of 44.7 percent, according to the median forecast.
The projected shortfall in trade would reflect in part a rise in the cost of imported commodities, Jinny Yan, a Shanghai- based economist at Standard Chartered, said last month. Wen said during a meeting with foreign executives March 22 in Beijing the deficit for early March was $8 billion.
The trade surplus narrowed for four straight months through February. The shift reflects China’s accelerating manufacturing and retail sales at a time when U.S. spending is hurt by job cuts and falling home values.
Growth in the world’s third-largest economy quickened to 10.7 percent in the fourth quarter of 2009, the fastest pace since 2007. Inflation was a higher-than-forecast 2.7 percent in February and property prices rose the most in almost two years.
‘Temporary’ Deficit
The March trade gap may not be sustained as exports pick up pace.
“We believe the deficit was temporary,” said Peng Wensheng, head of China research with Barclays Capital in Hong Kong. “Exports will pick up in the rest of the year, and we expect the trade balance to return to positive starting in the second quarter.”
Separate figures are projected to show M2, the broadest measure of money supply, rose 22.2 percent in March, slowing from a gain of 25.5 percent in February.
