China Trade Surplus Poised to Cap Biggest Quarter Since Crisis

China may report</a> a $17.8 billion trade surplus for September that would cap the biggest quarterly excess since the financial crisis in 2008, adding fuel to U.S. calls for import protection.

The median estimate of 24 economists surveyed by Bloomberg News compares with an August surplus of $20 billion. That would take the third-quarter total to $66.5 billion, the largest since the fourth quarter of 2008. The data will be released tomorrow.

The U.S. Senate will consider legislation that would allow duties to be imposed on Chinese imports because of the nation’s failure to allow bigger currency gains, according to Senator Charles Schumer of New York. Yuan forwards surged to the highest level in more than two years yesterday on speculation that Premier Wen Jiabao’s government will yield to U.S. and European pressure.

“China’s trade surplus may reach $200 billion this year, giving the U.S. and Europe more ammunition,” said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. who formerly worked for the International Monetary Fund and the European Central Bank. Policy makers should speed gains by the yuan “because a currency war would be most damaging to China,” Shen said.

By comparison, the trade surplus was $196 billion in 2009.

Currency Reserves

China may also this week announce the third-quarter increase in the nation’s foreign-currency reserves, which climbed $48 billion to a record $2.5 trillion, according to the median estimate in an economists’ survey.

The yuan fell 0.1 percent to 6.6742 per dollar as of 9:46 a.m. in Shanghai today.

Inflows of capital from trade and foreign investment and so-called hot money betting on gains by the Chinese currency are complicating management of the fastest-growing major economy. Besides keeping inflation in check, policy makers want to cool the real-estate market to prevent asset bubbles.

China’s central bank unexpectedly and temporarily raised reserve requirements for six large commercial lenders, reining in liquidity as the economy stabilizes, according to a Reuters report yesterday.

The ratio will increase 50 basis points and for two months, the news agency said, citing four people who weren’t identified by name. The current level is 17 percent for the biggest banks and 15 percent for smaller ones. Market News cited traders, also not identified by name, to the same effect. The People’s Bank of China and the six banks declined to comment.

Draining Liquidity

Li Shanshan, a Beijing-based banking analyst at BoCom International Holdings Co., said the reported move may be to drain liquidity because of 570 billion yuan ($86 billion) of central bank bills maturing in October.

Isaac Meng, a Beijing-based economist at BNP Paribas, said that the central bank may have acted in anticipation of extra money flowing into China because of quantitative easing in the U.S. and investors betting on the yuan.

“To combat rising inflation concerns the best option would be to raise interest rates, but apparently the Chinese government cannot do that for fear of more capital inflows,” said Dorris Chen, a Shanghai-based bank analyst who also works for BNP Paribas.

Twelve-month non-deliverable forwards jumped 0.8 percent to 6.4390 per dollar as of 5:30 p.m. in Hong Kong yesterday, indicating the currency may strengthen 3.6 percent against the dollar from the spot rate. The yuan yesterday touched 6.6610, the highest since 1993. The Chinese currency has gained more than 2 percent since the government said in June that it would allow more flexibility.

Slower Trade Growth

China’s exports probably grew 26 percent last month from a year earlier, compared with a gain of 34.4 percent in August, according to the economists’ survey. Import growth may have slowed to 25 percent from 35.2 percent.

Debate about competitive devaluations dominated International Monetary Fund meetings last week. U.S. Treasury Secretary Timothy F. Geithner renewed his call for China to let its currency rise and Luxembourg Prime Minister Jean-Claude Juncker, who chairs a panel of euro-area finance ministers, said the yuan is “more than undervalued.”

Chinese central bank Governor Zhou Xiaochuan said his nation needs to avoid the “shock therapy” of excessive yuan appreciation and “very fast” gains probably wouldn’t end global economic imbalances. Yuan gains of 20 percent to 40 percent would exacerbate Chinese unemployment and cause social upheaval, according to Premier Wen.

--Li Yanping, Luo Jun. With assistance from Jay Wang in Singapore. Editors: Paul Panckhurst, Andrew Barden

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

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

Enlarge image

China Raises Big Banks’ Reserve Requirements

Nelson Ching/Bloomberg

Pedestrians walk past the People's Bank of China.

Pedestrians walk past the People's Bank of China. Photographer: Nelson Ching/Bloomberg

Oct. 12 (Bloomberg) -- Robert Kapp, former president of the U.S.-China Business Council, discusses U.S.-China trade relations and the outlook for the yuan. Kapp speaks with Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Oct. 11 (Bloomberg) -- Dariusz Kowalczyk, senior economist and strategist for Credit Agricole CIB, talks about international disputes over currency valuations and its potential impact on global trade and economies. Leaders of the world economy failed to narrow differences over currencies as they turned to the International Monetary Fund to calm frictions that are already sparking protectionism. China was accused of undervaluing the yuan, while low interest rates in the U.S. and other rich nations were blamed for flooding emerging markets with capital. Kowalczyk speaks with Linzie Janis on Bloomberg Television's "Global Connection." (Source: Bloomberg)

Oct. 11 (Bloomberg) -- Eswar Prasad, a senior fellow at the Brookings Institution, talks about the International Monetary Fund's annual meeting yesterday in Washington and China's currency policy. Global governments tasked the IMF with calming the recent outbreak of tensions over currencies amid signs they are already triggering a protectionist backlash. China, accused of keeping the yuan undervalued to boost exports, said they will stick to a gradual rise in the currency’s value to avoid social turmoil. Prasad talks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)