By Thomas Clouse
China is making its currency exchange rate more flexible, the central bank announced on June 19, loosening the Chinese renminbi’s 23-month-long peg to the US dollar. The announcement came after China’s trade surplus rose sharply in May, up 11-fold from April to $19.5 billion. May’s inflation figures were also high, with the consumer price index up 3.1% year on year and property prices in 70 large and medium-size cities up by 12.4%. The loosening of the renminbi’s peg to the US dollar could reduce the trade surplus and alleviate inflationary pressure. At the same time, the expectation of renminbi appreciation could spur capital inflows, complicating the central bank’s efforts to control the money supply.
Rural idyll: Chinese workers seek employment close to home
China is tightening the reins on local government borrowing, introducing new rules for government-owned investment companies. Because national regulations prevent local governments from borrowing directly from banks, local governments often set up companies to borrow money from banks to invest in infrastructure and other public projects. These investment companies enjoy the implicit guarantee of the government and effectively skew government debt figures and undermine banks’ risk assessment procedures.
Recent labor strikes across China are putting pressure on companies to raise wages and improve working conditions. Foreign and domestic companies, especially those in China’s traditionally export-oriented coastal areas, are facing tighter labor conditions as better infrastructure and stronger investment in China’s interior allow the country’s migrant working population to find employment opportunities closer to home.
China’s commerce ministry announced in June that it would extend its automotive trade-in subsidies until the end of the year. The subsidies, which were originally set to expire at the end of May, boosted China’s light vehicle sales to 7.1 million units in the first five months of the year, according to JD Power.