Yuan's rise no quick fix for trade surplus

(Shanghai Daily)
Updated: 2007-01-17 10:01

A stronger yuan won't immediately enable China to achieve a trade balance because the economy will depend largely on exports for the foreseeable future, the Ministry of Commerce said yesterday.

The appreciation of the national currency should be combined with policies that rein in the money supply, moderate the international payment surplus and boost domestic spending, officials said.

"China remains one of the first options for global firms when it comes to investment, and the country counts on that to bolster its economy," the commerce ministry said. "Therefore, the trade gap will exist for a pretty long period of time."

The ministry also attributed the huge gap to the United States, China's biggest trading partner, blaming it for its high spending and low savings rates.

China's trade surplus swelled to a record US$177.5 billion in 2006, up from the US$102 billion a year earlier, as overseas sales continued to grow rapidly. The widening gap may hinder the government from achieving its goal to resolve the trade imbalance by 2010.

The ballooning surplus has flooded the economy with cash and sent its foreign-exchange reserves to new highs. Holdings jumped 30 percent year on year to US$1.07 trillion at the end of December, the most in the world, the central bank said.

The central bank is gradually delivering its promise to make the yuan more flexible in a move to ease the surplus. It also issued bonds, raised interest rates and told banks to set aside more money in reserves to soak up cash. The commerce ministry said on Monday that the yuan would rise in the long term, climbing a further 4 to 5 percent this year against the US dollar.

The yuan finished at 7.7900 against the US dollar yesterday. The Chinese currency has appreciated almost six percent against the dollar since July 2005, when the central bank abandoned its decade-long fixed exchange rate of 8.28 to the greenback.

"The appreciation of the yuan will help narrow the trade gap, effectively allocate resources and enable the economy to sustain its growth," the ministry said.

China economy may have expanded 10.5 percent in 2006 and could grow 9.8 percent this year, according to estimates by the National Development and Reform Commission. The government will release final economic figures next Thursday.

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