China's Export Rebound May Let Wen Intensify Effort to Curb Surging Prices

China’s faster-than-expected growth in exports and imports last month may allow Premier Wen Jiabao to strengthen his fight against inflation, which probably exceeded his target for the ninth straight month in March.

Overseas shipments jumped 35.8 percent and imports climbed 27.3 percent, unexpectedly pulling the trade balance into surplus after a $7.3 billion shortfall in February, the customs bureau said yesterday.

“March export figures came in stronger than expected, shrugging off the impact of Japan’s disaster and the surge in oil prices,” said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong. “This reconfirms that inflation rather than growth remains as the key risk for China. Get ready for more reserve ratio and rate hikes in the coming months.”

The government will use reserve requirement ratios, interest rates and foreign-exchange rates to “eliminate the monetary basis for inflation,” Premier Wen Jiabao said during a visit to Zhejiang province on April 9, the official Xinhua news agency reported. Wen reiterated that controlling price gains is his top economic priority after food and housing costs surged, threatening social stability.

Investors are growing confident that the economy can tolerate monetary tightening, with China’s benchmark stock index climbing 9 percent since the first of two interest-rate increases this year. The index’s advance has beaten the 0.6 percent gain in the Standard & Poor’s 500 Index and a 1.4 percent drop in the MSCI Asia Pacific Index.

Accelerating Inflation

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, rose for a fifth day. It climbed 0.8 percent to 3,053.24 at the 11:30 a.m. break.

Consumer-price gains climbed 5.2 percent in March, exceeding the government’s 2011 target of 4 percent for the third month, according to the median estimate in a Bloomberg News survey. The statistics bureau is due to release the data on April 15.

Inflation in China is “somewhat out of control and causing some serious danger of wage-price inflation,” billionaire investor George Soros said yesterday at a conference in Bretton Woods, New Hampshire. “It would be very advantageous to allow the currency to appreciate as a way of controlling inflation,” said Soros, chairman of Soros Fund Management LLC.

Higher commodity prices contributed to the nation recording its first quarterly trade deficit since 2004, underscoring the case for yuan gains to help contain prices. Inbound crude oil shipments in the first quarter rose 12 percent by volume and 39 percent by value to $43.7 billion. The cost of iron ore imports jumped 82.5 percent to $27.7 billion while the amount of metal climbed 14.4 percent, customs data showed.

Quicker Gains

China’s economy would ultimately benefit from greater appreciation” in the yuan, Stephen Green, head of research for greater China at Standard Chartered Plc in Shanghai, said in an interview with Bloomberg Television. Green predicted a “quicker” pace of appreciation in the currency in the second quarter after a 0.9 percent gain versus the dollar in the January-to-March.

The People’s Bank of China has raised interest rates four times and boosted banks’ reserve requirement ratios six times since early October. Credit Suisse Group AG forecasts the benchmark one-year deposit rate, which has risen 1 percentage point to 3.25 percent, will climb another 1.5 percentage points by the end of the year.

No Hard Landing

A report this week may show China’s gross domestic product expanded 9.4 percent in the first quarter from a year earlier, according to the median estimate in a Bloomberg News survey. The economy grew 9.8 percent in the fourth quarter.

There’s “little risk of a hard landing,” Paul J. Heytens, China country director of the Asian Development Bank said last week, citing “robust” growth in industrial production, retail sales and real-estate investment.

Expansion will ease to 9.6 percent this year from 10.3 percent in 2010 as the government’s fiscal stimulus winds down and monetary policy is tightened, the Manila-based lender forecast.

The growth in March exports beat the forecasts of 24 out of 25 economists in a Bloomberg News survey and was 53 percent higher than the median estimate, while the gain in imports topped the 20.6 percent forecast. The $140 million trade surplus compared with the median forecast for a deficit of $3.35 billion.

Export Growth

“The better-than-expected exports and imports should remove concerns there will be a rapid economic downturn,” Dong Xian’an, former chief economist at Industrial Securities and now at Beijing-based Peking First Advisory, said in a note yesterday.

Export growth to China’s biggest trading partners -- the European Union and the U.S. -- accelerated last month as their economies recovered from the global financial crisis, customs bureau data showed. Shipments to Japan surged 37.4 percent from a year earlier to a record $13.1 billion.

U.S. policy makers have pressed China to allow quicker gains in the yuan to help narrow trade imbalances, with Treasury Secretary Timothy F. Geithner continuing to describe the currency as “substantially undervalued.”

The PBOC set the yuan’s daily reference rate against the dollar at 6.5401 today, a record high for the seventh straight trading day. The currency touched a 17-year high on April 8 and was little changed at 6.5367 per dollar as of 10:02 a.m. in Shanghai, according to the China Foreign Exchange System. The yuan has gained more than 4 percent over the past 12 months, less than half the rise of Singapore’s dollar.

Containing Inflation

“China is still facing strong pressure from imported inflation,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group in Hong Kong who formerly worked for the World Bank. “While the authorities can use fiscal subsidies to offset this, the exchange rate tool is more effective to contain imported inflation.”

The Organization for Economic Cooperation and Development said last week an economic recovery among the world’s most advanced economies is gathering strength. The Paris-based body forecast the Group of Seven economies excluding Japan probably expanded an annualized 3.2 percent in the first quarter and 2.9 percent in the second.

--Zheng Lifei, Victoria Ruan. With assistance from Jay Wang in Singapore, Sophie Leung and Susan Li in Hong Kong and Baizhen Chua in Beijing. Editor: Nerys Avery, Ken McCallum

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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