China surpassed Japan in February to become the world’s largest holder of foreign exchange reserves, partly as a result of China’s efforts to maintain the yuan’s exchange rate, which is fixed to a basket of currencies. The momentum is unlikely to slow without a policy change, as March’s trade surplus rose to $11.2 billion, up from $5.7 billion a year earlier. The record-breaking foreign exchange reserves and accelerating trade surplus will further increase pressure for China to establish a more flexible exchange rate.
Chinese president Hu Jintao felt some of that renewed pressure last month during his first state visit to the United States. In preparation for the trip, a Chinese delegation led by Chinese vice premier Wu Yi traveled to the US in early April, committing to sign more than 100 contracts, worth over $16 billion, with US companies. The deals included the purchase of 80 Boeing 737 airplanes, estimated to be worth about $4.6 billion. China also made several concessions on trade issues, announcing in an April 11 joint statement with the US Department of Commerce that it would strengthen copyright protection, further open its telecom and medical device markets and lift a ban on US beef imports.
Debate within China over the benefits and dangers of foreign investment has intensified following the release of data showing there was a record-breaking $66 billion in mergers and acquisitions in China in 2005. Such concerns have stalled US-based Carlyle Group’s $375 million bid for an 85% stake in Xuzhou Construction and Machinery. The deal awaits approval from China’s Ministry of Commerce, which has requested more information from Carlyle Group addressing monopoly concerns and the company’s eventual exit strategy.