China has recently been condemned for its large trade surplus which is believed to be a result of it's currency being undervalued. One calculation for the yuan by the International Monetary Fund (IMF) suggests that it is undervalued by about 23%. While IMF has not given specific guidelines for what the norm of a country's currency should be, it is suggested to be about 2.9% of GDP. Large account surpluses go hand in hand with cheap currency. However in 2011, China's surplus shrank to 2.8% of GDP which is the smallest surplus relative to economic size since 2002.
The future of China's surplus is in question. Some predict that China's surplus could grow again if there is a recovery of export markets and prices for commodities fall. Others believe that it may fall within1% next year and could be negative within two years. Even with their economic imbalances seeming to straighten out China's economy is not totally stable. The narrower surplus suggests that there has been more investment as opposed to consumption as a portion of the GDP which would be impossible to sustain in the long term so there could still be a large internal imbalance.
This may prompt the Chinese government to rebalance the economy. Private consumption has been increasing at a rate slower than the economy in general, but this also could be a result of improper calculations of figures by including things that are not typically counted in measurements. Given the shear size of China's economy the balance and magnitude of growth and surpluses can have agreat impact. Moving forward, this should be given extra attention.
http://www.economist.com/node/21547826
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