The customs release for the first ten months of 2020 put China’s goods exports at about RMB 16.2 trillion, up 11.4% year on year, and goods imports at about RMB 12.2 trillion, up 4.7%. The simple takeaway is that trade was unusually active: imports and exports both grew. That says the economy was relatively lightly hit by Covid, and that the consumer market was still active.
Behind that healthy headline, however, there is a less comfortable story: China’s goods trade surplus has kept widening. That points to serious foreign-exchange appreciation pressure once the pandemic ends. Why would a large surplus create pressure for the currency to rise? The US-led Western view has long been that China’s large goods surplus is caused by an undervalued exchange rate, which amounts to a hidden export subsidy and has a whiff of dumping.
I don’t buy all of it. China runs a goods surplus but a services deficit; most trade profit comes from goods. If China were dumping goods at a loss, it would be providing free service to the world. China is not a resource-rich country; its exports depend heavily on imported raw materials. It cannot import at high prices and sell finished products at a loss. That makes no sense. The fact that consumers worldwide choose Chinese goods suggests they are good value. Consumers are shrewd; their choices maximize their consumer surplus. When American and European consumers buy Chinese goods, they get a bargain. By extension, their economies benefit from goods trade with China. The larger China’s surplus, the more they are getting out of it, not the other way around.
Second, the exchange rate and the trade surplus may have no relationship at all. The Western claim that the RMB is undervalued, that this encourages exports, and that Chinese exports cause job losses abroad is nonsense.
From 1995 to 2004, the RMB was stable against the dollar because it was pegged to the dollar, and China’s goods surplus was stable too. From 2004, China moved to a basket anchor and abandoned the dollar-only peg. The RMB appreciated quickly, and China’s goods surplus surged. That is the opposite of what the Western argument predicts.
During the 2008 global financial crisis, China launched a RMB 4 trillion stimulus, and the US and Europe also delivered strong stimulus. The effect faded only around 2014. During that period the RMB kept appreciating against the dollar, which suggests the US was easing even more. China’s surplus was basically stable, and RMB appreciation did not reduce it. That also contradicts the Western claim. Between 2014 and 2017 the exchange rate swung sharply, but interestingly China’s goods surplus broadly moved with the exchange rate: when the RMB depreciated, the surplus increased; when it appreciated, the surplus decreased.
Since 2017, and especially after 2020, the pattern again contradicts the Western claim. The RMB kept appreciating while the surplus widened further, and the expansion accelerated. Covid has a lot to do with it. China controlled the outbreak earlier and production recovered relatively well. In autumn, Europe and the US were hit by a second wave, leaving their production half-stalled. They depended more on Chinese imports and had fewer goods to sell to China. Both effects enlarged China’s surplus.
The customs data for 2019 through October 2020 help separate goods from services. Overall, China’s goods trade has stayed in surplus, while services trade has stayed in deficit. That also shows China’s relatively heavy dependence on foreign technology and services.
One data note: because of Covid, customs did not publish January 2020 goods trade separately; it was combined with February. The services figures are handled the same way.
In 2020, the goods export surplus was clearly higher than in 2019, and absolute exports were higher too. So the claim that Covid “made” China’s 2020 economy has something to it. Service imports and the services balance were lower than a year earlier, showing that the pandemic hit Western economies hard and limited their exports. The escalating trade war is another factor: by restricting high-tech exports to China, the US has hobbled itself and widened its deficit with China.
On the numbers, the goods trade surplus was RMB 1.1114 trillion in January–October 2019 and RMB 1.6342 trillion in January–October 2020, up 47%.
The line charts make the same point: China’s trade surplus in the same period of 2020 was larger. In those charts, February data were averaged across January and February.
The global pandemic still shows no sign of ending; optimistically, it may be controlled in the second half of next year. That means for another year the world will keep printing money to stimulate demand while shutting down production to fight the virus. China can already rely on domestic circulation, and exports are even better than in previous years, so it has less need for stimulus and less need to print. But China’s exchange rate is currently anchored to a basket including the dollar, euro, pound and yen. We do not know the weights, but those currencies will depreciate as issuance continues, so the RMB should appreciate in relative terms. Because the RMB tightly tracks the basket, the headline rate may stay flat or rise only slightly. That mismatch is what will produce pressure from Europe and the US after the pandemic to let the RMB rise.
Washington has complained for years that the RMB is undervalued and has tried to force appreciation, even though this will not reduce its deficit with China or raise employment. Politicians push it because they need it politically. After Covid the demand will be stronger: they will cite jobs and economic needs, and it is a familiar way to divert domestic conflict. This time pressure may come not only from the US but from capitalist economies generally. Many Southeast Asian and other third-world countries peg to the dollar, so they too have an interest in a stronger RMB. By the end of next year, much of the world could be calling for RMB appreciation.
Why not now? China’s exports are mainly anti-pandemic supplies and daily necessities. Everyone is printing money to get through the day. If they demanded RMB appreciation now, they would have to print even more, and their currency systems might collapse before the pandemic ends. Once the emergency is over, countries can be expected to turn on China; between states there are permanent interests, not gratuitous affection.
What to do? It is time for large companies and the state to go shopping in the US and Europe: buy high-tech products and services China needs, and minerals and other resources; if not needed now, stockpile them. Another option is to relax or even lift exchange-rate controls. Since the RMB is in fact appreciating, foreigners will be willing to buy RMB to capture the gains. The central bank can then issue more money, let the RMB depreciate in relative terms, build foreign-exchange reserves, and push RMB internationalization. That would accomplish several things at once.