160 Airbus aircrafts and equipment for two nuclear power plants: this large order seems to have loosened the tight relations between China and the EU on trade and the exchange rate.

The end of November 2007 witnessed frequent visits by EU leaders and high officials to China. French president Nicolas Sarkozy first arrived, then Jean-Claude Juncker, chairman of the Eurozone finance ministers’ group, followed by Jean-Claude Trichet, president of the European Central Bank, and Joaquín Almunia, the EU monetary affairs commissioner. All came to Beijing for high-level discussions with the officials of China’s central bank and Ministry of Finance. An issue of common concern was pressing China to accelerate the appreciation of Renminbi against the euro. Some are depicting this as a war between Euro and Renminbi.

Since 2007, the global finance structure has gone through dramatic changes as a result of the depreciation of the US dollar. The trade deficit of US is narrowing, whereas that of the EU is enlarging. EU politicians ascribe this to the “gradual” exchange rate reform of Renminbi. Ever since 2005 when China adopted a managed floating exchange rate regime, Renminbi has risen 11% against the US dollar while depreciating against other currencies.

For example, on December 1, 2005, 100 pounds sterling was worth RMB1410, but on December 1, 2007, the same amount was worth RMB1560. Similar for the Canadian dollar: two years ago, 100 Canadian dollars was worth RMB682, but now goes for RMB800. As for Renminbi against Euro, two years ago, 100 euro could be exchanged for about RMB946, whereas now it goes for about RMB1087.

This relative depreciation of Renminbi has lead to the accelerated growth of China’s trade surplus with the EU. Jean-Claude Trichet, president of the European Central Bank, reveals that Renminbi has depreciated 8% against Euro since 2005, meanwhile, China’s trade surplus with the EU has risen over 20%. In the first nine months of 2007, China’s trade surplus with the EU reached US$94.8 billion, taking up half of China’s trade surplus. China is also the only source of the EU’s trade deficit. That’s why many people consider the EU trade deficit with China to be a result of the depreciation of Renminbi against Euro.

In the eyes of scholars, the currency war is actually a war on trade. The EU has issued a statement that if China cannot help narrow the EU trade deficit with China, the EU will be forced to take anti-dumping measures to protect itself from China’s exported products. France is the largest EU nation, and Airbus is one of the EU’s most important companies. China’s contract with Airbus thus bears more meaning than it appears. According to some analysts, China and the EU might have reached an agreement that Renminbi will keep its gradual pace of appreciation on the condition that China enlarges its orders with the EU. The EU is China’s largest trade partner, and the two have enough patience to reach a compromise.

The imbalance of global trade is no new issue. The market, when confronting this issue, no longer seems to work. Government interruption thus might be unavoidable.