Shrinking Surplus May Help China in Undervaluing Yuan

China’s trade surplus may narrow to an eight-year low in 2012 as slowing external demand undermines exports, a shift that may help the nation rebuff overseas criticism for maintaining an undervalued exchange rate.

Yuan Outlook

The yuan was at 6.3176 in Shanghai, retreating further from a high last month, when it surpassed 6.3 for the first time in 18 years. It will gain 2.4 percent to 6.14 yuan per dollar by the end of this year, compared with a 4.7 percent increase last year.

A diminishing surplus may damp liquidity growth, giving China’s central bank more scope to cut banks’ required reserve ratio. People’s Bank of China Governor Zhou Xiaochuan said on 8 January the nation must be ready to combat possible global economic shocks. JPMorgan Chase & Co. sees a further cut in the reserve ratio as soon as this week.

China’s December lending and money supply growth exceeded economists’ estimates, signaling monetary conditions may be easing, data showed on 8 January. New loans totaled 640.5 billion yuan ($101 billion) for the month. M2, a measure of money supply, rose 13.6 percent, compared with the 12.9 percent median of 18 estimates.

Reserves Stabilize

“With the gradual stabilization of foreign-exchange reserves and close to zero current-account surpluses, China will have more arguments to oppose Washington’s demand on currency appreciation,” said Herve Lievore, an economist for Asia at AXA Investment Managers in Hong Kong.

China’s import growth outpaced that of exports every month since May as Europe’s turmoil hit. Estimates for December signal a 19 percent drop in the trade surplus last year from 2010. Commerce Minister Chen Deming said Jan. 5 the excess probably dipped 13 percent to $160 billion, or 2 percent of gross domestic product.

The U.S. Treasury said last month it will seek further gains in the yuan and called the currency undervalued, while declining to brand China a manipulator of its exchange rate. Geithner’s visit this week is part of a trip that also features a stop in Tokyo, with talks scheduled to include discussions on sanctions on Iran for its nuclear development plans.