Paul Lachine

China Adjusts

Not long ago, the renminbi was substantially undervalued and China’s trade surpluses were very large. But the situation is changing: forces of adjustment are at work in the Chinese economy, and foreign perceptions need to adjust as well.

BAHRAIN – China watchers are waiting to see whether the country has engineered a soft landing, cooling down an overheating economy and achieving a more sustainable rate of growth, or whether Asia’s dragon will crash to earth, as others in the neighborhood have before it. But some, particularly American politicians in this presidential election year, focus on only one thing: China’s trade balance.

True, not long ago the renminbi was substantially undervalued, and China’s trade surpluses were very large. That situation is changing. Forces of adjustment are at work in the Chinese economy, so foreign perceptions need to adjust as well.

China’s trade surplus peaked at $300 billion in 2008, and has been declining ever since. (Indeed, official data showed a $31 billion deficit in February, the largest since 1998.) It is clear what has happened. Ever since China rejoined the global economy three decades ago, its trading partners have been snapping up its manufacturing exports, because low Chinese wages made them super-competitive. But, in recent years, relative prices have adjusted.

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