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China Hopes Trade Deficit Will Slow Calls for Weaker Currency

An employee seals a stack of yuan banknotes at a branch of Industrial and Commercial Bank of China in Huaibei, Anhui province, April 6, 2011

China hopes its first quarterly trade deficit in seven years will quiet calls for it to revalue its currency, which Western nations say is artificially low and gives Chinese companies a trade advantage. Some economists, however, say the trade deficit will not last.

Latest data released by the General Administration of Customs shows China’s deficit for the first three months of the year is slightly more than $1 billion.

Li Wei, an economist at Standard Chartered in Hong Kong, said the deficit figure is a one-time thing, helped by the rising costs of imports into China. He said the trade balance will return to surplus, in the coming months, and the pressure on China to revalue its currency will remain strong.

"Beijing is trying reduce its trade balance, but it’s going to take time," said Li. "There’s no answer to that. We will see a trade surplus again in Q2 [the second quarter] and Q3. We still do think the yuan is structurally under valued and it’s not just in the trade surplus, but also in the financial and capital accounts, which is why we are calling for a 5 percent CNY [Chinese yuan] appreciation against the U.S. dollar for this year. And, we think just one quarter of a small trade deficit doesn't make the revaluation calls go away."

The rare deficit already looks short lived. China reported a tiny trade surplus of $140 million in March.

Beijing aims to spark domestic demand and reduce the role of exports in the economy through wage increases, rather than through exchange-rate gains wanted by the United States and other countries.

Beijing is accused of keeping the yuan artificially low, to support its export sector. A weaker currency makes China's goods cheaper, giving its exporters have an edge against their international competitors.

There has been a slight appreciation of the yuan in the last year. It gained more than four percent against the dollar. But Western nations want it to rise in value quickly.

Beijing argues a sudden appreciation of its currency would be harmful to its economy and those of others, as the world tries to recover from the global financial crisis.