I will believe that China is serious about rebalancing its economy when it stops posting record monthly trade surpluses. The money and lending growth numbers no more suggest rebalancing away from an investment led economy than the export growth numbers suggest rebalancing away from an export led economy. Exports were up 25%(y/y) in May. For the first five months of the year, the pace of increase was 26% -- there is no evidence yet of any slowdown.
And even with record oil prices (China imports oil you know, lots of it), import growth isn't keeping up with export growth.
China exported $73.1b in goods in May. In April, US goods exports were $81.9b. Chinese goods exports look likely to top those of the US later this year.
Unless something changes, China's 2006 trade surplus looks on track to reach $150b -- and its current account surplus is on track to approach $200b. And that comes in the face of strong price increases for all of China's commodity imports. China isn't just buying raw materials either. Aircraft imports are up 80% so far this year (with 135 aircraft delivered in the first five months in 2006). It isn't hard to figure out why US exports to China have been growing rapidly this year -- and why Hu visited Seattle.
China has not released its reserve numbers for April and May. But I am betting the increase will be shockingly large. The combined April and May trade surplus alone will push reserves up by $23b. And with over $900b in reserves (counting reserves shifted to the state banks), Chine has a decent sized euro portfolio. And the dollar value of that portfolio went up in both April and May. I would bet capital inflows into China picked up as well. I wouldn't be surprised if the dollar value of China's reserves increased by $30b in May. That is just a hunch. I suspect the underlying monthly -- that is the increase after taking out valuation gains -- increase in China's reserves is now close to $25b a month.
$25b a month is a $300b annual pace -- real money, in other words, even if divided by 1.3 billion people. Remind me again why China can not allow the RMB to move above 8 on a sustained basis? And remind me again why so many economists think the RMB isn't really undervalued?
Even if China dropped its capital controls, China would need to experience absolutely massive capital flight just to keep its large trade and current account surpluses from putting upward pressure on the RMB.