China's Trade Surplus Widens, Adding Pressure on Yuan

China’s trade surplus widened to the highest this year and exports climbed more than estimated to a record in June, adding pressure on the government to let the currency gain after the U.S. said the yuan “remains undervalued.”

The gap increased 140 percent to $20.02 billion from a year earlier, the nation’s customs bureau said yesterday. That compares with the $15.6 billion median estimate of 24 economists Bloomberg News surveyed. Exports surged 44 percent and import growth moderated for the third month, rising 34 percent.

U.S. Treasury Secretary Timothy F. Geithner said July 8 he will “closely” monitor the yuan’s appreciation after China scrapped a two-year peg to the dollar and allowed a 0.8 percent advance in the past three weeks. Policy makers in the world’s biggest exporting nation may be reluctant to step up gains while Europe’s debt woes threaten demand, even as the bureau said trade has “recovered” to levels before the global crisis.

The surplus “points to the need for Chinese authorities to allow continued appreciation of the yuan against the U.S. dollar, given their pledge to allow market forces to determine the exchange rate,” Wang Qing, a Hong Kong-based economist at Morgan Stanley, said. He estimates the yuan will gain 4 percent by the end of this year and 6 percent next year.

Currency Gains

China took a “significant step” last month when it began to allow markets to drive the currency higher, the Treasury Department said in a report to Congress released July 8, after postponing the release in April. It’s not yet clear whether the policy shift will correct the yuan’s undervaluation, it said.

New York Democrat Senator Charles Schumer called the report “disappointing,” saying “it’s clear it will take an act of Congress to do the obvious and call China out for its currency manipulation.”

Trade “has recovered to pre-crisis levels,” Zheng Yuesheng, head of the customs bureau’s statistics department said in an interview on state television yesterday after the release of the data, echoing the views of some economists that the European sovereign-debt crisis has yet to impact overseas sales.

Exports to the U.S. and European Union jumped by more than 40 percent for the second month, and exports to Russia climbed 84 percent in June, according to the statement. Shipments to Brazil, which more than doubled in April and May, surged by 125 percent last month.

Record Exports

Signs that global trade remains buoyant include a report by container-shipping line AP Moller-Maersk A/S of shortages of cargo boxes. The International Monetary Fund last week raised its 2010 global growth forecast to 4.6 percent from an April estimate of 4.2 percent.

The value of China’s outbound shipments rose to a record $137.4 billion in June, the customs bureau said. The previous high was $136.68 billion in July 2008, before the global financial crisis deepened. The 43.9 percent expansion compared with the median 38 percent forecast in a Bloomberg News survey of 24 economists.

“We suspect stronger-than-expected exports might be the result of the frontloading of commodity-intensive product exports as a result of the VAT rebate policy change,” Goldman Sachs economist Song Yu wrote in a note yesterday.

Export tax rebates for a number of goods including some steel products will be removed from July 15, the finance ministry said last month.

Export Rebates

Steel-product exports more than doubled in the first six months from a year earlier to 23.6 million tons, the customs bureau said yesterday, without giving a year-earlier comparison for June.

“Exports may maintain relatively fast growth this quarter but downside risks may increase in the last quarter as the government gradually exits its export aid policies and shipments are more affected by the yuan’s appreciation and the European debt crisis,” said Jinny Yan, a Shanghai-based economist at Standard Chartered Plc.

Imports climbed to $117.4 billion in June, the third highest this year, the customs bureau said. The 34.1 percent gain compares with the median forecast of 35.4 percent in the Bloomberg survey.

“Lower-than-expected import growth is a reflection of lower import volume amid weakening domestic demand as well as falling import prices,” Goldman Sachs’ Song said.

Slower Investment

Iron ore and copper imports fell in June from May, the third straight monthly decline, the data showed. China is the largest buyer of the steel-making ingredient.

Average monthly trade surpluses may remain in a range of $10 billion to $15 billion later in the year, as a government- driven moderation in domestic investment leads to a bigger slowdown in imports, according to Wang Qian, Hong Kong-based chief China economist at JPMorgan Chase & Co.

Surging demand in China for commodities including iron ore and oil drove a 60 percent decline in the trade surplus to $35.4 billion in the first five months. In the first half of the year, the surplus declined 43 percent from the same period last year to $55.3 billion, the customs bureau said yesterday.

The nation’s manufacturing growth eased for a second month in June and a raw-material inventory index contracted, a purchasing managers’ survey released by the Federation of Logistics & Purchasing showed July 1. The report indicated a “sharp” decline in orders in industries including oil and metal processing.

Cooler Economy

Economic growth may gradually decelerate to 9 percent in the fourth quarter of this year, after an 11.9 percent expansion in the January-March period from a year earlier, according to a Bloomberg survey of economists. The statistics bureau is due to announce second-quarter gross domestic product data this week.

Concerns that the pace of expansion is cooling may damp market expectations for rapid currency gains, JPMorgan’s Wang said. Non-deliverable forwards suggest traders are betting the yuan will appreciate 1.7 percent in the coming year.

--Li Yanping. With assistance from Jay Wang in Singapore. Editors: Nerys Avery, Stephanie Phang

To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net

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