China urged to ease up on currency

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The Independent Online

Pressure on China to allow its currency to appreciate more quickly intensified yesterday after figures showed the country's trade surplus ballooned last month.

Thanks to a surge in exports from what has been dubbed the workshop of the world, China's trade surplus jumped to $22.45bn in May, up from $16.9bn the previous month and a massive 73 per cent increase on a year earlier. At the current rate, the annual surplus could clear $320bn this year, 10 times its level in 2004.

The huge surplus will provide more ammunition for protectionists in the US Congress who complain that Beijing is using unfair practices, including keeping the yuan artificially low, to boost its exports. Meetings last month between US and Chinese officials produced agreements on financial services and aviation, but not on exchange rates.

Before the meeting, Beijing held out an olive branch to Washington by announcing it would let the yuan trade more freely on foreign exchanges, allowing it to fluctuate by 0.5 per cent each day rather than the previous 0.3 per cent. However, the currency's subsequent rise has stalled since the talks. It dropped 0.11 per cent to 7.6632 against the dollar in Shanghai yesterday, bringing losses in the past three days to 0.36 per cent.

Mark Williams, international economist at consultancy Capital Economics, said the size of China's surplus was causing two problems. He said: "Externally, it is making the relationship with the US hard to manage. And within China, the foreign exchange earned from the surplus is making the central bank's job of controlling liquidity harder. If the bank loses this battle, investment, inflation and stock markets could all spiral to unsustainable levels."

Mr Williams said that neither of these problems was out of control at the moment, but the surplus is growing so rapidly that the situation could soon change. On the first problem, bilateral tension has recently shown itself in a spate of scares over the safety of imports ranging from Chinese monkfish to toothpaste in the US, and counter-claims by the Chinese about shipments of US pistachios, raisins and health supplements. On the second, the Chinese stock market's meteoric rise has triggered warnings of an imminent crash and spooked markets around the world.

Li Yushi, deputy head of a research institute under China's commerce ministry, said: "Chinese companies are still boosting exports relentlessly because they have no other choice. The domestic market size is limited, and local manufacturers have to export their products overseas. Take cigarette lighters, for example - the domestic market is full of cheap lighters made from Wenzhou and other places, and the lighter makers have to sell their products abroad."

At the meeting between trade chiefs of the EU and China today, EU Trade Commissioner Peter Mandelson will complain that Beijing is doing too little on intellectual property theft and limits on foreign investment. He will also raise concerns about China's fast-growing steel exports and the risk of a surge in textiles when quotas expire at the end of the year, EU officials said.