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Effects of China's Trade Surplus
One of the top priorities of the Chinese government this year will be the reduction of the trade surplus. The Chinese government will focus this year on importation instead of exportation. Taxes on imports have already been lowered to encourage Chinese companies.
It is important for the stability of both the global and Chinese market that China controls its surplus. China’s money supply has grown significantly in the last year primarily due to the trade surplus; these big flows of money make it harder for banks to control investment and inflation. The surplus adds to China’s foreign exchange reserve, which has contributed to rapid investment growth by adding to the money available for banks to lend out.
The big trade surplus China has with the U.S could lead to a global recession. A collapse in the ability of the United States to finance the shortfall could drive interest rates higher and block growth in the world's largest economy, economists have said.
The surging trade surplus has increased friction with trading partners. In this case the pressure of other governments on China’s revaluation of its currency is more a political than an economic matter. For the U.S and other countries that have a big trade deficit with China, the solution is clear: If China would revaluate its currency their trade deficit will reduce. Another benefit is that their domestic inflation will decrease as well.
China revaluated its currency slightly last summer. Some argue that it might be good for China to revaluate its currency because the revaluation of the Yuan can help the Chinese economy because the export will slow down, and China will have more control over its balance of payments. The reasons against the revaluation are that the Yuan will slow down China’s economy and the investment would also decrease in China. An Appreciation of the RMB would involve a major change in China's international monetary policy and have important consequences for growth and stability in China and the stability of Asia.
In general, the view in Asia is not to revaluate the Yuan while trading partners of China want an appreciation.