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As China, U.S. talk trade, yuan fuels export surge

China's delegation to Washington heads into its second day of strategic talks on Tuesday against the backdrop of a trade surplus that has hit its highest level in four months, increasing the pressure on the country to let its currency appreciate further against the U.S. dollar.



But with the yuan already at record highs, the news back home has focused on the need for China to set its own pace, and calls for the U.S. to treat China in a manner fitting to the world's second-largest economy and the U.S.'s largest creditor.



Trade data released earlier Tuesday shows a surplus in April of $11.4-billion (U.S.), nearly four times greater than expected. Exports grew more strongly than expected, up 29.9 per cent, while imports were up less than anticipated, at 21.8 per cent.

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Commodity prices and the Japanese earthquake and tsunami are thought to have had some impact, but much of the rebound from the first quarter's rare trade deficit is attributed to the yuan exchange rate.



"Today's data show that Chinese exporters continue to benefit from a supportive exchange rate," RBC wrote in a note to clients, warning that the yuan's moderate gains against the U.S. dollar have not stopped it from losing ground against other major currencies. "This is helping to boost its exports, but is also contributing to stronger inflation. This will likely add to the pressure from Washington for Beijing to allow faster currency appreciation."



At home, however, coverage of the China-U.S. Strategic and Economic Dialogue has focused on the need for China to resist U.S. complaints and follow its own path.



"It is not as if China has been deliberately trying to defy comments or suggestions that the U.S. has raised. Notice has been taken of all the complaints and demands. But China cannot and will not simply follow U.S. instructions," read an editorial this week in the Global Times, the English-language newspaper run by the state-controlled People's Daily. "In the currency issue, for example, China has been adjusting the renminbi's value gradually, which is far from the speed and extent the U.S. expects. It is like a floodgate. China has absolute control of the floodgate. How much water should be released and when is for China to decide."



The trouble is, observers warn, is that China's currency policy is the subject of major debate at home, between those who argue for faster appreciation, and those who believe they are moving quickly enough. On Monday the People's Bank of China pegged the yuan at a new record high of 6.4988, just ahead of the talks' opening.



"There's a very tense debate domestically in China about this appreciation…the export sector is very powerful," warned Michael Pettis, a professor of finance at Beijing University's Guanghua School of Management, who said expectations from this round of talks were best kept modest.



"The currency matters, but it's not the only thing that matters. Currency matters, and interest rates matter, and wages matter."

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