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Worsening terms of trade for China

Second comments on Yiping Huang “China needs to adjust its monetary policy now”, 18/04/2010, http://www.eastasiaforum.org/2010/04/18/china-needs-to-adjust-its-monetary-policy-now/comment-page-1/#comment-112078

Further to my comments yesterday, it seems that so far we all have ignored an important point that is the change in terms of trade detrimental to China, in addition to the volume effects on its current account balance.

As Asian economies including China and India expand, commodity and oil prices are moving up and fast. We have heard reports that iron ore prices have doubled for major Australian miners, that means possibly a new record, given that the last year’s fall in price was about a third from its record high. Oil prices have been above $US80 and are trending up.

The sluggish demand from most industrialised countries mean falling or steady prices for their imports of labour intensive and manufactured goods that are the main exports from China.

This means a sharp deterioration in China's terms of trade is appearing, which will have serious effects on Chinese businesses and its economy including increasingly large current account deficits over the coming months and possibly years to come.

That indicates that it will be economic suicide to appreciate the Chinese currency now.

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