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FT’s Wolf: They May Listen to U.S. but Ultimately China Does What’s “Convenient”

Fin - Daily Ticker - US

Fearing runaway inflation and a much higher than expected trade surplus in March, China is changing its tune on currency appreciation. Chinese officials won't make any official statement changes but "there was a marked change in the tenor of conversations over China's yuan policy from previous negotiations" at this week's high-level talks between China and the U.S., reports the Wall Street Journal.

China's enormous trade surplus raised eyebrows on Tuesday after it grew dramatically in April to $11.4 billion from only $139 million in March, according to data from the General Administration of Customs. The wide spread is likely the result of China's policies to curb "domestic overheating and what they saw as excessive credit growth," says Martin Wolf, Financial Times economics commentator, in the accompanying video.

In the interview with the Daily Ticker's Aaron Task, Wolf notes China will likely allow the yuan to appreciate at a much faster clip, but that's not because of U.S. pressure. "In the end, the Chinese do what is convenient and appropriate for them and they don't pay much attention to the rest of the world," he says. So far, China has stuck to the plan it laid out last year to boost the value of the currency by about 0.5% a month. That may soon change as Beijing policymakers do what they can to battle inflation.

Here's how Brian Jackson of the royal Bank of Canada summarized China's inflation issues and how they relate to its currency and the trade surplus:

"The trade data show that Chinese exporters continue to benefit from a supportive exchange rate. Although the yuan is posting moderate gains against the dollar, it has lost ground against other major currencies, so in trade-weighted terms China has seen its currency weaken over the last six months or so. This is helping to boost its exports, but is also contributing to stronger inflation. This number will likely add to the pressure from Washington for Beijing to allow faster currency appreciation, but more importantly should persuade Chinese policy-makers that a stronger yuan can be tolerated by the economy and is warranted as part of their efforts to curb price pressures."

In the interview, Wolf notes China's growing appetite for natural resources is going to drive up prices not only in China but around the world, even if the yuan is fairly valued. "It's important to stress some of the effects of China on the word economy are inescapable," he argues."We are going to have to adjust to China's rise."