CHINA TRADE SURPLUS WIDENS / THE FINANCIAL TIMES ( RECOMMENDED READING )

China trade surplus widens

By Geoff Dyer in Beijing

Last updated: August 10 2010 18:22

China’s trade surplus surged again in July to its highest level in 18 months, adding to the political pressure on Beijing to appreciate its currency more quickly and highlighting questions about global imbalances.

The trade surplus for July increased to $28.7bn, well ahead of the $20bn recorded in June and significantly more than analysts’ forecasts. The figure, one of China’s largest ever monthly surpluses, comes at a time when the US trade deficit has been widening.

The data reflected a continued strong increase in exports, which rose 38.1 per cent year on year. Although this was down from the 43.9 per cent increase in June, Barclays Capital calculated that on a seasonally adjusted basis, exports had been 1.2 per cent higher than in the previous month.

At the same time, the pace of growth in imports slowed sharply from a 34.1 per cent year-on-year increase in June to a 22.7 per cent increase in July. This represented a seasonally adjusted drop of 5.6 per cent from the previous month, according to BarCap, as slowing domestic investment cooled Chinese demand for imports. Industrial production figures expected to be released on Wednesday will provide further insight into the extent of China’s slowdown.

The rise in the trade surplus will focus attention on the modest pace of appreciation in the renminbi since Beijing’s announcement in June that it was abandoning the de facto currency peg it had operated for two years against the US dollar. Since then the renminbi has risen only 0.8 per cent against the dollar, much of that in the first two weeks.

Tom Orlik, an economist at Stone & McCarthy in Beijing, said: “A booming trade surplus can only add fuel to the smouldering fire on the creeping slow pace of renminbi appreciation.”

Sander Levin, chairman of the US House of Representatives ways and means committee, has called a hearing on the Chinese currency for when Congress reconvenes in September.

China’s trade surplus could shrink again if weakening US and European demand hits exports or if Beijing eases some of the tightening measures it has introduced to try to cool its economy, which earlier in the year appeared to be at risk of overheating.

The World Bank expects China’s current account surplus as a proportion of gross domestic product to be considerably lower in the next few years than it was prior to the crisis.

Yet there is a risk that China’s external accounts will lead to a dangerous political stalemate. High trade surpluses could prompt calls in Washington for decisive action on the exchange rate, especially as November’s US midterm elections approach, while the slowdown in the Chinese economy makes Beijing even more reluctant to appreciate its currency.

Fan Gang, a former member of the Chinese central bank’s monetary policy committee, said the present gradual pace of currency appreciation could yet add up to a significant move over a longer period.

“It could be big in the medium term and it will be meaningful for the rebalancing of the global economy,” he said in a speech.

However, Mark Williams at Capital Economics said: “Today’s trade data underline how little progress China has made in rebalancing its economy”. He added: “Nearly two months after the relaunch of currency policy reform, the exchange rate can best be described as, once again, a dollar peg.”

In spite of fears about a potential collapse in house prices, Beijing said on Tuesday that prices in the country’s 70 largest cities last month had remained flat compared with June. On a year-on-year basis, however, the pace of increase slowed to 10.3 per cent from 11.4 per cent in June.

Copyright The Financial Times Limited 2010.