Chinese growth picture

The two main drivers behind the surging Chinese growth numbers remain massive exports, which continue to fuel the record-breaking size of the U.S./Chinese trade imbalance and fixed-asset investment.

Second quarter 2006 GDP growth surged 11.3 percent, but economists expect moderation toward 10 percent in the fourth quarter.

China continues to benefit from its undervalued currency (the renminbi, or yuan), which keeps its exports flowing out the door. The Chinese trade surplus rocketed to $18.8 billion in August, the fourth consecutive month of new record highs. In U.S. dollar terms, exports gained 32.8 percent year-over-year.

Annual exports in 2005 were upwards of $762 billion, with the U.S. being the single largest importer, according to James Pressler, associate international economist at the Northern Trust Co. in Chicago.

“China’s trade surplus shows no signs of slowing down,” says Sean Callow, senior currency strategist at Westpac Institutional Bank in Singapore. “The official news agency, Xinhua, predicts the surplus will exceed $20 billion per month before 2006 is over. This infuriates trading partners such as the U.S. and Europe and inflames protectionist sentiments.”

Despite international pressure from the world’s finance ministers, only a minimal amount of appreciation in the yuan has occurred since the initial 2.1-percent upward shift in July 2005.

“It has been very disappointing,” Pressler says. “Usually a country that runs such a huge trade surplus would appreciate their currency dramatically. The currency is still artificially weak, even though it has been rising. Currently, the yuan is trading at about 7.95 to the U.S. dollar. Some analysts say it should be trading more in the 6.95 or even 6.50 region right now, if market forces were allowed to dominate.”

The U.S. has tried to influence the Chinese to revalue the yuan by as much as 10–15 percent. However, market watchers note the global pressure on China has seemingly resulted in more resolve on their part to do what is best for their country.

Most China watchers expect yuan appreciation to continue in the months ahead, but at a continued slow and measured pace. Pressler’s year-end target is 7.90 for the yuan. By the end of 2007, he estimated the yuan could see parity with the Hong Kong dollar, now pegged at 7.78 to the U.S. dollar.