Paulson visits China again -- Lower U.S. trade deficit

August 8, 2007

U.S. Treasury Secretary Henry Paulson visited China again last week to try and lower the huge $232 billion trade deficit the U.S. has with China. The visit is round three of the “Strategic Economic Dialogue” begun by Paulson last year, soon after he was named Treasury Secretary. (See background: Paulson meets Hu in China, 12/20/06) The trade deficit is partly a result of China's undervalued currency, the yuan, and its 11% economic growth. 

Since Paulson's last visit (See Paulson to visit China, 3/7/07), China has implemented several measures:

• A transfer of $60 billion from the government's foreign reserves to two state banks, to prepare them for listing on foreign stock exchanges. (FT.com, China to inject bilions into banks, 8/5/07)
• Elimination of a 17% tax rebate for exporters, effective July 1, which will effectively raise the cost of exported goods. (Source: WSJ, China Exports Could Slow, 8/6/07)
• An increase in central bank interest rates, which drove the yuan to a new high against the dollar of 7.5596. (See China People's Daily, Yuan climbs to record high against dollar, 7/25/07)
• An increase in the reserve requirement for central banks to 12%, effective August 15. (Source: China People's Daily, China to raise reserve requirements, 7/3/07)
• A $3 billion investment in the U.S. Blackstone Group. (See China invests $3B in U.S. company, 5/23/07) Unfortunately, Blackstone stock was one of the hardest hit in last week's global plunge.

What a lower U.S. China trade deficit would mean:

Paulson is more worried about a collapse of the Chinese boom economy that he is about China as a competitor. That is why he is trying to strengthen the banking industry, regulate the stock market and institute more free market reform. To do so, he needs to use all the relationship building he developed during his years as CEO of Goldman Sachs.

However, the patience required to deal successfully with the Chinese may not be enough for an election-year Congress, who are under pressure from U.S. manufacturers to increase U.S. exports.  A lower trade deficit can only come with a higher yuan and higher prices for Chinese goods. Although it could also mean more jobs for U.S. workers, this will only help you if you are one of those workers. (Source: U.S. Treasury, Transcript of Secretary Paulson's Press Roundtable, 8/1/07; BusinessWeek,  Paulson's China Charm Offensive, 7/31/07)

Action steps:

Make sure you have commodities mutual funds in your retirement portfolio. Talk to your financial planner about the wisdom of including TIPS as a hedge against inflation. Read the World Money Watch Special Report, "Profit from China's Growth." 

Related articles:

U.S. tariff damages China relations, 4/4/07

China's bank raised interest rates, 3/24/07

Sec'y Paulson at the G-7, 9/20/06

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