China’s Economy Strengthened in October, Boosting Yuan Calls

Nov. 12 (Bloomberg) -- China’s industrial production and trade surplus climbed in October, indicating a strengthening recovery in the world’s third-largest economy that’s likely to increase pressure on policy makers to let the yuan appreciate.

The figures came days before leaders from the Asia-Pacific region gather in Singapore, and a visit by U.S. President Barack Obama to Beijing, where he plans to raise China’s currency policy. Premier Wen Jiabao has so far rebuffed pressure to loosen reins on the yuan, awaiting a bigger rebound in exports in an effort to secure social stability and job gains.

“For China, it is necessary and appropriate to allow the currency to be more flexible,” Asian Development Bank President Haruhiko Kuroda said in an interview with Bloomberg Television in Singapore yesterday. “Crisis response by the Chinese authorities has been excellent,” and “they’ve brought about a very strong economic recovery,” he also said.

Production rose 16.1 percent from a year before, the most since March 2008, the statistics bureau said in Beijing yesterday. Retail sales gained an annual 16.2 percent in October, it said. The trade surplus almost doubled from September, to $24 billion, as the slide in exports eased to the slowest pace this year.

Hours after the economic indicators were released, the central bank said foreign-exchange policy will take into account global capital flows and changes in major currencies, prompting speculation it will allow the currency to strengthen. The yuan’s peg to the dollar since July 2008 has left it dropping along with the U.S. currency against the euro and yen.

Yuan Stance

Policy makers will improve the setting of the yuan’s rate in a “proactive, controlled and gradual manner and based on international capital flows and movements in major currencies,” the People’s Bank of China’s said in a quarterly report yesterday. Officials have previously aimed to keep the yuan “stable.”

“The change in description of the yuan policy may signal an early warning to the market,” said Shi Lei, a Beijing-based analyst at Bank of China Ltd., the nation’s third-largest lender.

The PBOC also suggested that policy makers are attuned to the danger that China’s record stimulus efforts will cause asset prices to climb as economic growth strengthens. Central banks should consider “broad” measures of price stability, rather than just consumer prices, the bank said.

‘Gradual Move’

“It shows the central government has concerns about a massive rise in property and equity prices, because consumer- price inflation isn’t an issue at the moment,” said Paul Tang, chief economist at the Bank of East Asia Ltd. in Hong Kong. “Beijing wants to signal that they will make a gradual move from the current loose monetary policy.”

China’s officials have already indicated they intend to tighten lending terms after an 8.92 trillion yuan ($1.31 trillion) boom in new loans in the first 10 months of the year. Credit growth eased in October, a report yesterday showed, with banks extending 253 billion yuan of new local-currency loans, compared with 516.7 billion yuan in September.

For now, the central bank pledged to maintain a “moderately loose” stance, and said the economy can maintain stable and relatively fast growth.

Stocks rose in the region, with the MSCI Asia Pacific Index closing up 0.4 percent. The Shanghai Composite Index, which has risen 74 percent this year, ended little changed. Twelve-month non-deliverable yuan forwards rose 0.1 percent to 6.6244 per dollar, showing traders predict about a 3 percent gain in the currency in the coming year.

Japan Recovery

Asian shares also gained on signs that a recovery in Japan, which has lagged behind its Asian neighbors, may last. A government report showed machinery orders surged 10.5 percent in September, more than twice the median estimate in a Bloomberg News survey of economists.

In other figures yesterday, urban fixed-asset investment climbed 33.1 percent in the first 10 months of this year, consumer-price declines eased and the supply of money climbed at a record pace.

The increase in industrial output was more than economists’ median forecast for a 15.5 percent gain and retail-sales growth was also ahead of estimates. Faster gains in production and sales underscore forecasts for growth to exceed 10 percent this quarter, and for China’s economy to surpass Japan’s as No. 2 next year.

APEC Summit

China’s policy makers are facing pressure to let the currency rise, World Bank President Robert Zoellick said yesterday in Singapore, where the Asia-Pacific Economic Cooperation group, which includes the U.S., Japan and China, holds a summit Nov. 14-15. He predicted that the government will allow the currency to become more “internationalized” in coming years.

China has maintained the currency’s value at around 6.83 against the dollar since July 2008, after allowing it to rise 21 percent in the previous three years.

Obama said in an interview with Reuters Nov. 9 that he will bring up currency issues when he meets with President Hu Jintao and Wen in Beijing next week. The U.S. Treasury Department last month criticized “the recent lack of flexibility” in the yuan.

European Central Bank President Jean-Claude Trichet said last week a stronger Chinese currency would help the global economy, and the International Monetary Fund has called the yuan “significantly undervalued.” Japanese Vice Finance Minister Yoshihiko Noda told reporters last week it is “desirable for the yuan to be flexible.”

Trade Report

As overseas demand for China’s products recovers, such pressure may intensify. The customs bureau said the decline in exports slowed to a 13.8 percent annual pace in October, compared with a peak of 26.4 percent in May. The trade surplus reached the highest level since December, excluding seasonal distortions in January and February.

At the same time, policy makers have warned that it’s too early to begin abandoning the measures designed to insulate China from the deepest global recession since the 1930s.

Zhang Weihua, the deputy head of the statistics bureau’s industry department, said yesterday on the agency’s Web site that an imbalance between growth in heavy and light industries argues against being “blindly optimistic.”

Alibaba.com Ltd., most of whose revenue is derived from Chinese exporters, expects the recovery in trade will weaken next year because of “flat” overseas demand, Chief Executive Officer David Wei said in an interview this week.

Stimulus Efforts

Besides building 270,000 low-rent homes, 200,000 kilometers (120,000 miles) of rural roads and nearly 1,500 kilometers of railway under a $586 billion stimulus plan, China’s government has pressed banks to lend, flooding the economy with cash. The World Bank cautioned last week that the nation may risk asset bubbles and a “misallocation of resources.”

Urban property prices jumped 3.9 percent in October, the biggest increase in 14 months, the statistics bureau said this week. The value of sales jumped 79.2 percent in the first 10 months of 2009 from a year earlier.

China’s economic growth is projected to accelerate to 10.5 percent in the fourth quarter, according to the median forecast in a Bloomberg News survey of economists. Gross domestic product rose 8.9 percent in the third quarter from a year earlier.

--Li Yanping, Kevin Hamlin, Sophie Leung, Zeb Eckert, Keiko Ujikane, Shamim Adam and Mark Lee. Editors: Chris Anstey, Matthew Brooker

To contact Bloomberg News staff for this story: Li Yanping in Beijing at yli16@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net