China July Trade Surplus Surges as Imports Soften (Update3)

By Bloomberg News
Aug. 10 (Bloomberg) -- 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 12:36 p.m.
in Hong Kong. The Nikkei 225 Stock Average slid 0.6 percent; Japan’s government today cut its economic outlook for China, the nation’s biggest trading partner, for the first time in 18 months. Australia, where growth has been propelled by Chinese demand for iron and coal, saw its S&P/ASX 200 lose 1.1 percent.

Yuan Trading

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 11:15 local time was trading 0.1 percent lower from yesterday’s close at 6.7730.
"There will be further upward pressure on the yuan, even if it’s only politically, and Beijing will hear some complaints from trading partners," said David Cohen, Singapore-based economist at Action Economics who previously worked for the U.S. Federal Reserve.
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.
Exceeding Forecast
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.
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 trade surplus is the biggest since January 2009 and compares with $20 billion in June and $10.63 billion in July 2009.
The unexpected widening of the surplus and stronger-than- expected jump in exports risks stoking tensions with the U.S.
and Europe. China has become the "top target" of global trade friction and the biggest "victim" of trade-related investigations, Zhong Shan, vice minister of commerce, said in June.

U.S. Elections

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.
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 surplus 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.
Staff from the International Monetary Fund concluded the yuan is "substantially" undervalued, according to a statement released by the Washington-based lender last month after releasing its annual assessment of the country’s economy. Some IMF directors said an appreciation of the yuan would help the country rebalance growth away from exports and investment to private consumption, the fund said.

‘Resilient’ Companies

Premier Wen Jiabao may allow some gains even if export growth slows as recoveries in the U.S., European Union and Japan, China’s biggest markets, falter. 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.
"If China runs large monthly trade surpluses, it’s very likely to invite more external pressure for the renminbi to appreciate," Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd., said before today’s release, using another term for the yuan. "The trade balance will be an important indicator of the renminbi’s valuation."
Liu expects the yuan to rise 3 percent by the end of the year.