China is again hinting it may allows it currency a little more freedom in its peg against the US dollar, although they clearly feel little pressure in the short term to do so. The large trade deficit America has with China is an going factor in the relations, even though the weakening US dollar is already working to reverse the huge US trade deficit. In September the trade deficit between China and US was $15.5 billion for the month. The US also had deficits with Japan ($6.1 billion), the EU ($7.7 billion), Canada ($5.3 billion) and OPEC ($6.7 billion). In other words, everybody.

While eventually liberalising China's currecy is the right way to go, it is important to look at the facts before saying it should be done to help correct the US-China trade deficit. You see, China runs a small trade surplus, overall. China takes raw materials, and being the world's manufacturer, it turns them into products it sells to Wal-Mart. Then it uses the money from that trade to buy things it wants, like Japanese cars or by travelling overseas. Even if China were to float its currency, it is unlikely to appreciate much on the back of trade flows. Speculative flows are a different story...

An extensive breakdown of China's trade stats is here. Tables 5 and 6 are particularly telling.