China's Widening Trade Surplus Adds to Yuan Pressure

China’s trade surplus reached an 18- month high as exports rose to a record and import gains slowed, adding pressure on officials to allow faster appreciation of the yuan and signaling a diminished contribution to global growth.

The gap surged 170 percent from a year earlier to $28.7 billion, the customs bureau said, exceeding the forecasts of all 29 economists in a Bloomberg News survey. Exports increased 38.1 percent to $145.5 billion and imports advanced 22.7 percent to $116.8 billion, the bureau said on its website today.

Premier Wen Jiabao’s government has limited the yuan’s rise to less than 1 percent since ending a two-year peg to the dollar, and today’s report may stoke criticism by U.S. lawmakers three months before mid-term elections. The slowest pace of import growth in nine months added to evidence of a moderation in China’s expansion and contributed to a slide in Asian stocks.

“The pressure on the renminbi is still on the upside,” said Wang Tao, a Beijing-based economist at UBS AG, who forecasts the currency, known also as the yuan, to post a 4 percent increase for the year. Meantime, government efforts to rein in polluting industries and damp overheated investment spending mean domestic demand is slowing in China, she said.

The MSCI Asia Pacific Index fell 0.9 percent at 3:05 p.m. in Hong Kong. Australia, where growth has been propelled by Chinese demand for iron and coal, saw its S&P/ASX 200 lose 1.1 percent.

China’s benchmark Shanghai Composite Index dropped 2.9 percent, the most in six weeks, as the trade data and the slowest growth in property prices in six months fueled concern the world’s third-largest economy is losing steam. Property prices in 70 major cities rose 10.3 percent in July from a year earlier and transactions by floor area shrank 29 percent from June, the statistics bureau said.

Yuan Gains

China’s central bank yesterday set the yuan’s daily reference rate for spot trading at 6.7685 per dollar, the strongest level since the country scrapped a decade-old peg to the U.S. currency in July 2005. The rate was set at a weaker 6.7745 today and at 4:38 p.m. local time was trading 0.06 percent lower from yesterday’s close at 6.7714.

U.S. Treasury Secretary Timothy F. Geithner said Aug. 4 he will “watch closely” how much the yuan is allowed to appreciate, after saying the previous month the currency was undervalued.

The trade surplus is the biggest since January 2009 and compares with $20 billion in June and $10.63 billion in July 2009.

Do More

With mid-term elections in the U.S. due in November, today’s numbers may provide lawmakers with fuel to increase demands for the Obama Administration to take action against China, which they claim is deliberately keeping its currency undervalued to give exporters an unfair advantage.

A U.S. jobless rate still close to 10 percent may prompt “people in Washington to say China needs to do more to get its trade surplus down and that would involve a stronger currency,” said Brian Jackson, a Hong Kong-based emerging-markets strategist at Royal Bank of Canada.

China’s trade surplus with the U.S. rose 10 percent to $93 billion in the first five months of 2010, according to the American Commerce Department. China’s customs bureau puts the gap at $59.4 billion, 18 percent higher than a year earlier.

Democratic Representative Brad Sherman unveiled a proposal on Aug. 4 calling for China’s permanent normal trade relations status, which lowers U.S. duties on its imports, to be revoked, Agence France-Presse reported.

Gradual Appreciation

Staff from the International Monetary Fund concluded the yuan is “substantially” undervalued, according to a statement from the Washington-based lender last month after releasing its annual assessment of the country’s economy.

“In the long run, the renminbi will continue to appreciate against the dollar, but at a gradual pace,” Fan Gang, an economist and former member of the People’s Bank of China monetary policy committee, told a forum in Hong Kong today. “A gradual approach doesn’t mean a small move, it could be large over the medium term and meaningful for the rebalancing of the global economy,” he said.

The yuan appreciated 22 percent after China scrapped its decade-long peg to the dollar in July 2005 until gains were halted during the global financial crisis in 2008, Fan said.

Stronger economic data from Europe in the past month may allay Premier Wen’s concerns that the region’s sovereign debt crisis will harm sales to China’s biggest export market and give him more confidence to allow faster yuan appreciation.

European Outlook

Companies have become “increasingly resilient” to exchange-rate reform and exports haven’t been “substantially affected,” central bank deputy governor Hu Xiaolian said in a July 30 statement.

Growth in manufacturing in the 16-nation euro region accelerated more than previously estimated in July, an index of executive and consumer confidence in the economic outlook rose to the highest in more than two years and German exports rose more than forecast in June, according to data released since July 29.

“We’re not going to get a very sharp downturn in export growth in the second half and that should reinforce the case for a stronger currency in the second half of the year,” said RBC’s Jackson.

Growth in overseas sales from China, which overtook Germany last year as the world’s biggest exporter, moderated from 43.9 percent in June. The jump in shipments last month was more than the 35 percent median estimate in the Bloomberg survey.

Government Initiatives

The pace of expansion in imports, which compared with the survey’s median estimate of 30 percent, softened from 34.1 percent in June and was the smallest gain since growth resumed in November after 12 straight monthly declines.

The moderation “was expected because the government is taking the initiative to adjust policies that have resulted in cooling economic expansion,” Huang Guohua, head of the customs bureau’s statistics department told state television today after the data.

Softening imports “implies that China is making a smaller contribution to global growth, it’s buying fewer goods and services from the rest of the world,” Jackson said.

Copper and iron ore shipments from overseas in July climbed for the first time in four months, although they were still lower than the same period last year, customs data showed. Net purchases of crude oil fell to 18.8 million metric tons from a record 22.1 million tons in June as slowing growth reduced the need for the fuel, Bai Xuesong, a senior engineer with China International Chemical Consulting Corp. said.

BYD Co., the Chinese automaker backed by Warren Buffett, said last week it cut its annual sales target for 2010 by 25 percent to 600,000 vehicles and sales at Changan Ford Sales Co., Ford Motor Co.’s China unit, fell 6.3 percent in July from a year earlier.

--Sophie Leung, Li Yanping. With assistance from Jay Wang in Singapore and Belinda Cao and Huang Zhe in Beijing. Editors: Nerys Avery, Chris Anstey

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net Li Yanping in Beijing at yli16@bloomberg.net

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