Macroeconomic scenario of China

Chinas reluctance to allow its currency to appreciate vis--vis the dollar is an ongoing issue. The forex reserves of China is approximately 3.2 trillion dollars. Keeping such huge reserves in dollars is beneficial as USD still the currency that dominates. The current account balance of 2010 reads 305.4 BN dollars where as China reported a current account surplus equivalent to 59.8 Billion USD in the fourth quarter of 2011.The inflation rate in China was recorded at 2.2 percent in June of 2012.The country's currentaccount surplus fell to 2.8% of GDP last year.The IMF now expects it to dip to only 2.3% of GDP this year, and then to rise gradually to just above 4% of GDP by 2017.

The problem China currently facing is to increase the domestic consumption. We know that trade surplus implies Chinas exports are more than its imports. But the catch lies in the fact that the cost of the factors of production, namely, land, labor, and other factors such as environment, are artificially low. The situation has worsened as 12 employees of Foxconn, a major supplier for Apple committed suicide. As the wages start increasing, the cost of

production will increase, and will erode the advantage Chinese products enjoy in the world market. China wants to make renminbi a universal currency and hence started offshoring its currency. Recently, the central banks of many countries have started keeping reserves of RMB. In the long term, China wants to make renminbi as one of the major currencies to rival the US dollar and the euro. China wants to reduce its forex reserves, whose management is proving to be a difficult task for the Chinese authorities. Most importers of Chinese goods prefer to pay in dollars, instead of the RMB, which is adding to the stockpile of dollars. As compared to a trade volume of 500 billion renminbi in 2010, the first four months of fiscal year 2011 saw 530 billion renminbi being transacted showing signs of RMB internationalizing. Despite severe pressure, China has somehow managed to keep its currency intact. However, some senior officials in China have stressed the importance of reducing its forex reserves, and have advised the Government to expand its portfolio. That would ease the pressure on their reserves, and lead to redistribution of resources. Since China is one of the torch bearers of the world economy it remains to be seen how China shoulders its responsibilities. References:
http://www.tradingeconomics.com/china/current-account http://www.economist.com/node/21555767 http://www.chinability.com/CurrentAccount.htm