EU presses China to reform currency, reduce trade surplus

Analysis

Joaquin Almunia the European commissioner for economic and monetary affairs, urged China to allow more appreciation of its currency and curb its growing trade surplus.

“China’s economic expansion is currently too dependent on growing investment and raising trade surpluses,” Joaquin Almunia said in a speech at Beijing’s Qinghua University. Almunia said allowing the currency to appreciate would help to reduce the trade surplus and boost household consumption, which at less than 40% of China’s GDP is one of the lowest rates in the world. “A more flexible exchange rate policy would allow the central bank to raise interest rates and curb investment - in the long run this would help China to rely less on exports and more on consumption and investment geared towards the domestic market,” he said. He said China’s growing current account surplus was one of the “biggest sources of global imbalances.”

Almunia urged the Chinese government to allow faster expansion of health care, education, pensions and unemployment benefits. “Further reform in the financial sector, higher interest rates, as well as an improvement of productivity and quality of investment are also needed,” he said. He conceded that China had already taken several measures to rebalance the booming economy but said “progress until now has been rather slow” and that the trade surplus “continues to rise strongly. A more vigorous approach to reform is needed to prevent the current account surplus from expanding further and to reduce the risks to the global economy,” he said.

Critics say China’s currency remains severely undervalued and makes Chinese exports cheaper. The government has allowed the currency to appreciate gradually against the dollar over the last two years, but it has said it will not be pushed into faster currency reform. The World Bank last week said measures to curb China’s surging export growth appeared to have had little effect, after the trade surplus rose by 80% year-on-year to $137 billion in the first seven months of 2007.

Almunia also discussed economic issues with senior officials in Beijing and Shanghai during his three-day visit to China, which began on Monday. His talks would help to lay the ground for the EU-China Summit scheduled for November, the EU said. (m&c.com)

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