China’s exports grew by 48.5% in May in year-on-year terms, the biggest surge in six years, and far beyond market expectations.
First, the positives from the news. Markets leapt, because it seemed to show that Europe’s financial crisis is not having much impact on demand for Chinese goods. Qu Hongbin, economist at HSBC, reports that exports to the EU zone surged 49% in May, compared to last year.
But next, the potential negatives: the May data means that the focus swings back to the debate on renminbi appreciation. China’s total trade surplus for the month was back up to $19.5 billion, from $1.7 billion in April.
It was a strong set of numbers, Qu confirms, and not just a case of a low base for comparison from last year. Exports are returning to levels seen before the global financial crisis.
But HSBC still counsels against using a single month’s data to argue for a “meaningful” policy shift, pointing out that China’s trade surplus is trending downwards over the longer-term (down 60% on 2009 between January and May, for example).
That’s true. Then again, Chinese commentators took a single month’s data (a surprise trade deficit in March) to rebut calls for a stronger yuan. So there is little chance of their opponents giving up the opportunity to use the same tactic.
Back in the US, the export data is the latest act in an ongoing piece of political theatre, in which the Obama administration has been trying a ‘good cop, bad cop’ strategy to persuade Beijing to adopt currency reform.
Centre-stage is Treasury Secretary Tim Geithner, who is playing the voice of reason on renminbi revaluation. But behind him, he has Congress barking away for tougher action like a junkyard dog.
Last week Geithner experienced the growing frustration first hand, when he was on the receiving end of an impatient Senate Finance Committee. One committee member told him to “stop slow dancing” with Beijing and another – Democrat senator Charles Schumer – slammed him for a lack of progress on the currency issue. If the negotiations needed a theme song, it would have to be Maxine Nightingale’s Right Back Where We Started From, Schumer jibed.
It was an uncomfortable grilling. But at least it helped Geithner to stay on good-cop message to the Chinese: that he can’t keep Congress on a leash indefinitely, unless Beijing throws him a bone or two in policy terms. He even spelled it out directly: “I’m saying that it’s important for China to understand that Congress will act if China does not act”.
Any chance that Geithner’s promptings will be heeded? Not if Xinhua has anything to do with it. The state newspaper was in scornful mood last week, condemning Washington’s “bunch of baby-kissing politicians” and warning how they risk “poisoning the atmosphere” with further calls for action on the yuan.
The China Daily was a little more measured, although it wanted the international community to “correct its perception” of the Chinese economy. Economic development is still too unbalanced, its editorial argued. Outsiders needed to put on “a new pair of glasses” and recognise the challenges that China is facing.
Is there an alternative to the talk of confrontation ahead? The optimists counter that the May data gives Beijing an excuse to shift policy direction. A revaluation could be presented as a response to strong export performance, rather than as an outcome of US pressure. Further, Beijing might argue that a stronger currency is needed to hold down inflationary pressures (the CPI was up again in May, and topped the 3% target for the year).
The power of positive thinking, perhaps. But for the moment, a darker mood prevails. The Senate Finance Committee has been talking about taking action in a matter of weeks. Turbulent times may be around the corner.
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