China's July trade surplus close to record high

Aug 10, 2007 - China on Friday reported its second-biggest monthly trade surplus on record, handing more ammunition to critics who say Beijing gains an unfair trade advantage by keeping the yuan undervalued.

The surplus in July was $24.36 billion, down from June's record high of $26.91 billion, but above forecasts of $22.5 billion and dwarfing the July 2006 figure of $14.6 billion.

Economists had expected export growth to taper off after factories rushed to ship goods in June before rebates of value added tax were cut or scrapped on July 1 on 2,800 export lines.

But annual export growth in fact accelerated to 34.2 percent from 27.1 percent in June despite a string of recalls of Chinese products around the world, notably the United States, due to safety concerns involving everything from toys to toothpaste.

"It shows Chinese exporters are still scrambling to export despite government tightening," said Li Yushi, vice-director of a Ministry of Commerce think tank.

"Many exporters are privately run, and they have no intention to slow down their businesses," Li said.

Legislation is wending its way through the U.S. Congress that would impose duties on goods imported from countries like China deemed to have fundamentally misaligned exchange rates.

But Li said he doubted that trying to raise barriers to Chinese goods would make much of a difference.

"Demand for China-made products in overseas markets is still strong despite headline-grabbing anti-dumping cases and the like. I don't think there will be any massive boycott of Chinese products," he said.

INFLATION WORRIES

Li Huiyong, chief economist at Shenyin & Wanguo Securities in Shanghai, noted that exports usually gain momentum in the second half as factories gear up to meet Christmas demand.

The trade surplus in the first seven months rose 81 percent from the same period of 2006 to $136.8 billion, and Li said it could well reach $300 billion for the whole year.

The surplus in 2006 was $177.5 billion, easily a record.

"The surplus is still high and doesn't seem to have been affected much by the yuan's appreciation and cuts in export tax rebates," Li said.

The yuan has risen 7 percent since it was revalued by 2.1 percent against the dollar in July 2005 and untethered from a dollar peg to float within managed bands.

Annual import growth also outstripped expectations, accelerating to 26.9 percent in July from 14.2 percent in June.

Crude oil imports rose 39 percent, but Li with the Commerce Ministry said strength in imports also reflected robust domestic investment.

That would be a worry to policy makers, who are striving to prevent a resurgence of capital spending out of fear that the economy is already at risk of overheating.

Companies have strong incentives to invest. Global and domestic demand is strong, profits are rising fast and banks are awash in cheap money generated by the trade surplus.

Annual growth in the broad M2 measure of money supply spurted in July to 18.5 percent from 17.1 percent in June, the People's Bank of China said on Friday. The central bank is trying to cap M2 growth this year at 16 percent.

With the economy firing on all cylinders and money growth accelerating, the central bank is likely to tighten monetary policy further in coming months to nip inflation in the bud.

"Pressure on the central bank to tighten increases significantly with such a high growth rate in M2," said Li Mingliang, an economist with Haitong Securities in Shanghai.

INFLATION COMFORT

Li predicted another one or two interest rate increases by the end of 2007. The central bank has already jacked up borrowing costs three times this year.

Economists expect data on Monday to show that consumer price inflation rose to 4.9 percent in July from 4.4 percent in June.

There are rumours in markets that the figure could be as high as 5.6 percent, driven by a surge in pork and egg prices.

Analysts who contend that price pressures are confined to food took comfort on Friday from a dip in wholesale inflation in July to 2.4 percent, a 14-month low, from 2.5 percent in June.

They said the benign report lends support to the argument that, although the economy has been growing at a double-digit pace for five years, competitive pressures and productivity gains are keeping a lid on broad inflationary pressures.

"It's a figure that should give investors less reason to panic when we get a high-side CPI on Monday," said Ben Simpfendorfer with Royal Bank of Scotland in Hong Kong.