Peter Mandelson, the EU trade commissioner, has accused China of abusing the world trading system, warning in the bluntest language to date that Europe will not sit idly back while its exporters are blocked from the Chinese market.
The outburst came as China's trade surplus ballooned to $22.45bn (£11.4bn) in April, an increase of 73pc over the year before. The surplus has risen almost tenfold in three years, much of it at the expense of Europe.
"Europe's trade deficit with China is growing at €15 (£10) an hour. It could reach €170bn in 2007 on the current trend," said Mr Mandelson.
"This is not tolerable. The current trade balance is artificially inflated. It is a product of politics, as well as economics. China must take concrete steps to address the problem," he told a small group of reporters yesterday, on the eve of the EU's annual trade summit with China.
"If things do not change, if EU member states are not persuaded that this partnership is a genuine two-way street and is fully based on reciprocity, the policy of dialogue and cooperation can be 'challenged'," he said, using the Brussels code-word for retaliation.
Although Germany has done well, exporting machine tools and industrial kit to China, most of Europe has made little headway. The EU exports more to Switzerland.
Anger erupted two years ago in a summer "bra war", leading to import curbs to shield Europe's battered textile industry against a surge in imports. This expires at the end of 2007.
advertisementThe disputes are now spreading to other industries, with bitter complaints by car manufacturers over methods used to lock them out of China’s lucrative business for auto parts.
Mr Mandelson said market barriers alone are costing European companies more than €20bn a year, while endemic abuse of intellectual property rights explains why 80pc of all counterfeit goods stopped at EU borders come from China.
The root of the problem is that China’s state-run credit system ignores market price signals, leading to massive over-production. EU officials believe Beijing could cap the rise of the trade surplus at any time by letting the yuan rise to its natural level, instead of holding it down through purchases of US and European bonds.
The yuan is linked to the dollar through a crawling peg, and so Europe is bearing the full brunt of currency manipulation.
China’s trade surplus with the EU is now rising much faster than the surplus with the United States, and may overtake it in absolute terms next year.
Diana Choyleva, an economist at Lombard Street Research, said China had made a grave error holding down the yuan.
“They should have let it appreciate while they were booming like crazy. China is now so big that its current account surplus is like a spinning wheel that is bound to go crashing off at some point,” she said.
The policy is clearly starting to backfire as reserve accumulation – now over $1,200bn – is causing ''blow-back’’ into the Chinese economy.
“This is making the central bank’s job of controlling liquidity harder,” said Mark Williams, an economist at Capital Economics.
“If the bank loses this battle, investment, inflation, and stock markets could all spiral to unsustainable levels,” Mr Williams continued.
Inflation is rising and asset markets are now in full-blown bubble, prompting lending curbs by the Chinese central bank.
However, the Communist party bosses are afraid that a rising yuan could lead to a flood of cheap food imports and put farmers out of business by causing a glut.
The great fear is that some 200 million peasants could migrate to the cities over the next 15 years, turning the urban areas into political powder kegs.
Insider
It seems the same situation before the '87 market crash...
Germany and USA with their currency.....
