Perhaps the most notable thing about China's staggering export success is how little complaint it has caused in the wider world. Southeast Asia may bemoan the 'hollowing out' of its once competitive industries and trade spats with Japan are routine, but that has not spilled into discussions between the world's finance ministers. This may be about to change as Beijing's huge trade surpluses and bulging foreign exchange reserves focus attention on the value of the yuan.
Investors increasingly think the next movement in the unit will be upwards. Beijing earned plaudits for not devaluing during the 1998 financial crisis, at a time when many analysts predicted that its export industries would suffer at the hands of competitor Asian countries which let their currencies float. The agenda has moved on. China is indisputably the workshop of the world and appears to face little serious competition in most labour-intensive manufacturing industries.
Instead it is charged by some with exporting deflation due to its cheap currency and capacity-laden export industries. Global deflationary forces may have broader dynamics but many commentators point to China as a prime source of destructive price competition stirring the pot. Co-ordinated calls for Beijing to revalue the yuan upwards or at least allow greater flexibility in its trading bands cannot be far away.
The dilemma is one that officials are beginning to wake up to. Speaking in Hong Kong last week, Finance Minister Xiang Huaicheng admitted the yuan faced appreciation pressure, but did not offer solutions. A cheap yuan fuels export growth, the country's most active economic sector. It also attracts foreign direct investment (FDI) which has underpinned growth.
Projected FDI of US$55 billion this year may be distorted by so called 'round tripping' that allows mainland firms to dress up investment as 'foreign' and so win tax breaks, but genuine capital flows are integral to Beijing's growth plans.
An appreciation of the yuan may deepen the country's domestic deflation trend as imported goods become cheaper in yuan terms. However, in the longer term, liberalising the capital account is necessary as the costs of locking money at home are felt across the whole economy. The dilemma for Beijing is that this step comes with an associated loss of control as footloose local cash will likely depart.
