Global Uncertainty, Appreciating Yuan Impact China’s Growth Rate

September’s trade data released by the customs office of the Peoples’ Republic of China indicated that the country’s explosive export growth was slowing down. While both imports and exports for last month still showed impressive growth, being 20.9 percent and 17.1 percent respectively, the rapid pace of growth was easing off; with China’s trade surplus narrowing from August’s $17.8 billion to $14.5 billion for September. The gradual increase in the value of the renminbi, the alleged undervaluing of which has been a contentious issue for some time now, accounts for some of the narrowing in the trade surplus.

On Tuesday the US Senate took further steps to persuade China to more accurately value its currency, by passing a bill to impose tariffs on a range of Chinese goods in the event of the Treasury Department deciding that the renminbi (yuan) was being undervalued to China’s advantage. The bill still needs to be signed into US law, and many believe that this will not happen, as it is likely to result in a standoff between the two countries, which would be detrimental to trade. The renminbi has been gradually appreciating since the middle of 2010, and despite persistent calls for the currency to speed up its rise, Beijing has stood firm. While many speculate that this is purely resistance against US pressure, it is more likely a strategy to protect Chinese exporters.

Another reason for the slowdown in the growth of the Chinese economy is the upheaval caused by the ongoing debt crisis in Europe which is impacting on trade activity. Together with the weak US economy, global trade has been negatively impacted, and China could not expect to remain immune to the world-wide financial crisis. The International Monetary Fund recently warned that Asia could suffer some fallout from the financial turmoil in the United States and Europe, and this was borne out by the weaker-than-expected export data reported by China. Nevertheless, the IMF noted that Asian domestic demand remains resilient and is likely to sustain trade and economic activity across the Asia-Pacific region. Adjusting its growth forecast from the 6.8 percent for 2011 and 6.9 percent for 2012 that it made in April, the IMF is forecasting a growth of 6.3 percent for 2011 and 6.7 percent on average in 2012.