Yuan Needs to Rise in Value

News recently came out that China’s trade surplus was an astounding record-setting $13 billion in May, well above the $12 billion that pundits had been estimating. The sequential monthly growth was a strong 23.81%, as China’s export industry continues to prosper in an open market system.

 It is clear that the trend for China’s trade surplus is rising and at a much greater rate than the country’s main trading partners would like to see. The United States, the country’s main trading partner, is not happy about the situation.

 The sharp rise in the May surplus will clearly place pressure on the Chinese government to allow the yuan to strengthen in the foreign exchange market, something that the United States and other deficit-trading countries have long been pushing for.

 China will need to seriously evaluate the value of its yuan and interest rates. The massive surplus implies amble cash flowing into the country and raises the threat of inflation. May consumer prices in China came in at the highest level in four months as prices rose 1.40%.

 The central bank will need to curb inflationary pressures or risk the real possibility of a bubble if the current surplus trend is left unabated.

 It is clear that the undervalued yuan is the root of the problem. China has been told about this constantly, but so far has made only simple gestures and has yet to allow the yuan to float unhampered in the foreign exchange market where surely its value would rise.

 The reality is the yuan needs to rise in value. China’s recent GDP growth of 10.3% is simply too high and could lead to a market bubble. The Group of Seven industrial nations are asking China to allow the yuan more flexibility. The United States is looking at putting together a bill that would impose a 27.5% duty on Chinese goods.

 Stay tuned.