The International Monetary Fund cautions that China's trade surplus will balloon again unless the government takes more steps to support domestic consumption.
China’s government surplus plan, designed to alleviate the effects of the global financial crisis, also boosted domestic demand significantly, which fueled a rise in imports of raw materials and equipment to feed a construction boom, The Wall Street Journal reports.
China's current account surplus then fell sharply, reaching 4.5 percent of gross domestic product in the first quarter of this year, less than half the peak level of nearly 11 percent of GDP in 2007.
Ensuring that China’s trade surplus continues its decline will be "an exceptionally complicated exercise in macroeconomic engineering" that "will require concerted action on multiple fronts," the IMF said. "The critical mass of policy reforms that will be needed to realize this goal is not yet fully in place."
The IMF also contends that China must act to strengthen its currency.
A "stronger renmimbi is needed but exactly how strong is very difficult to say because the economy is changing so rapidly," said IMF China Mission Chief Nigel Chalk. The renmimbi is also known as the yuan.
Bloomberg reports that the Federal Reserve of Cleveland said that China’s decision to allow the yuan to strengthen against the dollar will fail to narrow the U.S. trade deficit because the appreciation is not substantial.
“All else constant, a renminbi appreciation should raise the dollar price of Chinese goods, lower the renminbi price of U.S. goods, and whittle away at our trade deficit with that country,” Owen Humpage, a senior economist at the Cleveland Fed wrote in a research note.
“Still, unless the exchange rate moves by a substantial amount, we probably will not see much of an effect.”
© 2013 Moneynews. All rights reserved.