While China undervalues its currency against the euro a Eurozone finally troika appears on the world stage - by Rick Morren
China's exports to the EU rose 26.6 percent on a year-to-year basis. According to EU figures, EU's imports from China totaled 135.6 billion euros, 4.6 billion euro's more than its imports from the United States. Consequently China has replaced the United States as the EU's largest import market. In exchange the EU has been the largest technologies provider for China and it was the major source of technology import for China in 2006. Unfortunately all is not rosy in this picture.
Jean-Claude Junker, Luxembourg's leader and finance minister who chairs meetings of euro zone states, told Financial Times Deutschland that their top-level EU mission to China was an example for how the euro area could "jointly" stand up for its interests. Mr. Juncker went to China together with European Central Bank (ECB) chief Jean-Claude Trichet and EU monetary affairs commissioner Joaquin Almunia for talks with Chinese officials – including prime minister Wen Jiabao – to discuss currency imbalances and resulting trade problems. The main purpose, however, of the meeting with China was that since 2005, the renminbi has fallen by almost 10 per cent against the euro while it has risen by more than 10 per cent against the US dollar - a development seen as a key factor in Europe's ballooning trade deficit with China. Mr. Junker said: "It is difficult to understand, whereas China is exporting less to the US than to Europe, why the Yuan is appreciating vis-à-vis the dollar and why the Yuan is depreciating against the euro."
It is common knowledge that the renminbi is undervalued and also pretty clear that China is manipulating the value of its currency vis-a-vis the euro. "China must be made to understand that trade is a two-way street", said one EU official. Chinese economic policies appear to be designed in favoring the dollar over the euro because of China's enormous trade balance with the USA. The commercial surplus of China towards the US was euro 158.321bn by the end of 2006, while the reserves are above euro 680.890bn, created by this difference, and partially through the abundance of direct foreign investments. Beijing obviously has its own interests in mind. China also has at its disposal US public shares worth another euro 236.173bn. All reasons pointing to why the renminbi has fallen by almost 10 per cent against the euro while it has risen by more than 10 per cent against the US dollar. To some this manipulation of the exchange rate by the Chinese might be understandable economic strategy, but to most economists it is not considered to be "fair play".
There are a number of economists who might challenge the assumption that China is not a 100% export economy anymore and that it needs to revalue its currency. The facts on the ground are a living proof that China is also quickly expanding its internal market. Most European and American companies that are setting up shop there now focus on domestic sales rather than export. Cities like Chengdu, Chongqing, and a variety of others are growing at a tremendously fast pace. In fact the consumer side of the Chinese marketplace is developing very positively. For starters China could easily revalue its currency by at least 10 percent and drop the two-tier system it now applies to the dollar and the euro.
In the meantime Europe can not sit back and let China set world economic policy based on their US "accounts receivable". The EU must act far more aggressively to exert international pressure on Beijing's monetary policy. If not, the EU could end up with the same level of indebtedness to China as the US.
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