China’s industrial production and trade surplus posted robust double-digit gains in October, indicating a strengthening recovery in the world’s third-largest economy. China, unlike the U.S. and other western industrial nations, has managed well in the advance of the global economic crisis. Such economic strength is also likely to increase pressure on policy makers to let the yuan appreciate as a hedge against inflation risks.
The announcement came days before leaders from the Asia-Pacific region gather in Singapore this week, and a visit by President Obama to Beijing next week, where he plans to raise the issue of China’s currency policy and a more “helpful” role that China can play in the global economy. China’s Premier, Wen Jiabao, and Zhou Xiaochuan, China’s Central Bank Chairman, have so far resisted pressures to loosen reins on the renminbi (yuan), awaiting a bigger rebound in exports in an effort to secure social stability and job gains.
“For China, it is necessary and appropriate to allow the currency to be more flexible,” Asian Development Bank President Haruhiko Kuroda said in an interview with Bloomberg Television in Singapore yesterday. “Crisis response by the Chinese authorities has been excellent,” and “they’ve brought about a very strong economic recovery,” he added. As a result, production rose 16.1% year-over-year, the most since March 2008, according to China’s state statistics bureau in Beijing. Meanwhile, retail sales gained an annual 16.2% in October. In addition, the trade surplus almost doubled from September, to $24 Bn, as the slide in exports eased to the slowest pace this year. The rise in retail sales is promising. If Chinese households can spend and consume more, and more capital investments by corporations, it can go a long way to leading a global economic revovery. Like most Asian nations, Chinese households and corporation are notoriously tight-fisted when it comes to spending, consumption and capital investment.
Hours after the economic indicators were released, the central bank said foreign-exchange policy will take into account global capital flows and changes in major currencies, prompting speculation it will allow the currency to strengthen. The yuan’s peg to the dollar since July 2008 has left it dropping along with the greenback against the Euro and the Japanese yen. Successively, China’s central bank holds more than $2Trn in U.S. Treasury reserves — enough to wipe-out the entire current U.S. federal budget deficit.
Chinese central bank policymakers have indicated they will improve the setting of the yuan’s foreign exchange rate in a “proactive, controlled and gradual manner and based on international capital flows and movements in major currencies,” the People’s Bank of China’s said in a quarterly report yesterday. Officials have previously aimed to keep the yuan “stable.”
“The change in description of the yuan policy may signal an early warning to the market,” said Shi Lei, a Beijing-based analyst at Bank of China Ltd. Read more here.
Source: Bloomberg; Globe & Mail Photo: LIU JIN/AFP/Getty Images
