China Trade Surplus Jumps 56 Percent to $23.9 Billion

Oct 12, 2007 - China's trade surplus jumped 56 percent in September to $23.9 billion, adding pressure on the central bank to increase borrowing costs and let the yuan strengthen faster to prevent the economy overheating.

The gap widened from $15.3 billion a year earlier, the customs bureau said on its Web site today, after gaining 33 percent in August. That exceeded the $21.6 billion median estimate of 20 economists surveyed by Bloomberg News.

Export earnings helped push China's foreign-exchange reserves to a record $1.43 trillion at the end of September, a separate report showed. Chinese stocks dropped on speculation the central bank is poised to raise rates for a sixth time this year as cash from overseas sales fuels inflation running at a 10-year high.

"All the money flooding in is a phenomenal problem for policy makers," said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. "The government may raise rates, but accelerating the pace of yuan appreciation or raising bank reserve requirements are more efficient tools."

The yuan has gained about 10 percent versus the dollar since the end of a fixed exchange rate in July 2005. The currency traded at 7.5080 at 3 p.m. in Shanghai after closing yesterday at 7.5057.

The CSI 300 Index of stocks fell 0.4 percent, after earlier plunging as much as 4.8 percent. It has almost quadrupled in the past year. Inflation reached an annual rate of 6.5 percent in August on food costs and the September figure may be announced as soon as next week.

Borrowing Costs

"Rates are likely to rise again because of the higher inflation rate," said Yao Maogong, head trader at Shanghai Securities Co. in the city.

The one-year lending rate increased to 7.29 percent last month and the central bank told lenders to set aside larger reserves for the seventh time this year.

Speculation an increase is likely comes ahead of the ruling Communist Party's five-yearly congress next week. Central banker Zhou Xiaochuan, who oversaw the revaluation of the yuan and raised borrowing costs for the first time in nine years in 2004, is likely to be moved to a new post after a five-year term, economists predict.

The trade surplus for the first nine months jumped 69 percent to $185.65 billion, topping the $177.5 billion record for all of last year.

M2, the broadest measure of money supply, increased by 18.5 percent in September, according to a report released today -- the eighth straight month that it has exceeded the central bank's 16 percent annual target.

`Anti-China Sentiment'

European finance ministers this week urged China to let the yuan appreciate more quickly against their currency to make its exports more expensive and narrow the gap. Recalls of Chinese- made products such as lead-painted toys have exacerbated trade tensions this year.

"Anti-China sentiment is only going to get worse," said Tim Condon, head of Asia research at ING Groep NV in Singapore, citing U.S. politicians' calls for protectionist legislation in the run-up to next year's presidential election.

Exports rose 22.8 percent in September from a year earlier to $112.48 billion and imports had the smallest gain in three months, climbing 16.1 percent to $88.57 billion.

"Imports are becoming weaker because they are being replaced by domestic production," said Sun Mingchun, an economist at Lehman Brothers Holdings Inc in Hong Kong. "The government should lower tariffs and boost domestic consumption to encourage more imports and the pace of yuan appreciation needs to accelerate too."

Bush: No `Trade War'

U.S. Treasury Undersecretary David McCormick last month said the yuan needs to strengthen faster to boost Chinese consumption and rebalance the world's fourth-largest economy. In the U.S., the Senate Finance Committee in July approved legislation aimed at pressuring China and other countries to allow their currencies to trade more freely.

President George W. Bush said he won't approve any laws that will 'start a trade war or spark protectionist policies,' the Wall Street Journal reported on its Web site today.

Exports to the U.S. rose 15.8 percent in the first nine months from a year earlier and those to Europe jumped 30.8 percent. Shipments to India soared 67.5 percent, the customs bureau said.

Growth in the surplus has slowed from June's 87 percent increase from a year earlier on cuts to export rebates.

The government is concerned that the growth in money supply is helping to fuel increases in property prices. In August, housing prices jumped 20.8 percent in Shenzhen and 12.1 percent in Beijing from a year earlier.

China has the world's fastest-growing major economy. It expanded 11.9 percent in the second quarter from a year earlier, the fastest pace in more than 12 years, on exports and investment.