In his recent Tsinghua PBCSF Forum speech, Huang Qifan acknowledges that China’s trade surplus is a problem for both China and the world, but he claims that the surplus "is not the result of a deliberate export-oriented strategy, nor of government efforts to drive exports through preferential treatment and incentive policies. Rather, it reflects the gradual strengthening of China’s manufacturing sector and the natural rise in its industrial competitiveness."

Treating a trade surplus as the consequence of a series of unrelated, incremental conditions may be something that many analysts do, but it is mistaken. A country's trade surplus is systemic, not incremental, caused in China's case by government policies that very specifically subsidize manufacturing production at the expense of household income.

There is nothing wrong with arguing that the rise in Chinese manufacturing exports may reflect "the gradual strengthening of China’s manufacturing sector" (although this "strengthening" was itself the result of highly-directed industrial policies), but the failure of imports to keep pace with rising exports has mostly to do with the failure of the growth in household income to keep pace with the growth in production. It was, in other words, the consequence of political decisions, and not simply a coincidental consequence of a growing manufacturing sector.

Huang calls for resolving this issue through a slow, gradual strengthening of the RMB (which works by shifting income from producers of tradable goods to net importers, i.e. the household sector) because too-rapid an appreciation may be disruptive.

It almost certainly will be. China's overall global competitiveness in manufacturing is mostly the flip side of its weak domestic consumption, and a rapid revaluation risks adjusting not through faster consumption growth but rather through slower production growth.

But it's not clear that after refusing to rebalance for 10-15 years, Beijing can now decide to do so at whatever pace it chooses. Both rising anger among its trade partners and (more importantly) surging domestic debt problems are limiting factors in China's ability to choose its adjustment pace.

What is clear, however, is that the sooner China begins the adjustment process, the less disruptive it will be, which means that China might not have the luxury of debating a few more years before it formally recognizes that its trade surplus is a problem both to the world economy and to itself.
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