Home > Development Economics, Exchange Rates, Trade > IMF reduces forecast for China’s trade surplus

IMF reduces forecast for China’s trade surplus

The IMF have recently stated that they are going to reduce China’s long-term forecast for its current account from a surplus from 7% of GDP to 5% of GDP – to be published in the IMF’s magazine entitled – “The World Economic Outlook (WEO)”. This might be useful if you are going to indicate that your currency is actually undervlued.

From the Wall Street Journal

Since at least 2009, the IMF has been describing China’s currency as “substantially undervalued”—and before that it sought to use the term “fundamentally misaligned,” though Beijing blocked that designation. China’s government intervenes in the market to keep the currency from rising and thus endangering China’s exports. The higher the exchange rate, the more costly a country’s exports to foreign customers.

Since 2008, the IMF has consistently overestimated how large China’s current-account surplus would remain. IMF officials say that’s because the fund overestimated how quickly U.S., Europe and Japan would recover from the global financial crisis of 2008 and 2009 and underestimated how much China’s economy would change so it relied less on exports.

In 2007, China’s current-account surplus as a share of GDP peaked at 10.1%. In 2008, the IMF forecast it would stay close to 10% in the years ahead. That formed the basis of the argument that the yuan was “substantially undervalued” and years of diplomatic pressure on China to allow more rapid appreciation. In fact, China’s current-account surplus in 2011 came in at just 2.8% of GDP.

This change to the IMF’s estimate will assist China in convincing its critics that it need not let the currency fall much further.

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  1. Simon
    April 15, 2012 at 4:58 pm

    Most people think that because China has a large trade surplus that if they ever run short of money they can bring that money home. This is true only to the extent that if they have a currency crises their PBOC can step in to buy if the currency crashes. But given the PBOC has been busily selling the currency to maintain a trade advantage and a stable low currency value for many many years it is unlikely they will need to do that any time soon.

    What the PBOC cannot do is use foreign currency reserves to make good bad loans made in China. Bringing the capital home, so to speak, would cause an undesirable curency appreciation and potentialy cause more bad to loans as businesses collapse due to becomming less competitive.

    They way I think about it is that the PBOC, being an institution that does not make anything and therefore cannot turn a profit, can only have a positive entry on one side on its ledger if it has a negative entry on the other side. What this means is that for every dollar credit of US or European treasuries one side of the ledger there is a loan to a local business or institution on the other side. It all sums to zero.

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