Huge surplus puts pressure on yuan

July 11, 2006|By BLOOMBERG NEWS

Beijing -- China's trade surplus widened to a record $14.5 billion in June as exports surged, increasing pressure on the government to let the yuan appreciate.

The surplus soared from $13 billion in May, beating the $12.8 billion median forecast of 26 economists surveyed by Bloomberg News. Exports increased 23 percent from June last year, the Ministry of Commerce said yesterday on its Web site.

Inflows of foreign exchange have pushed China's reserves to $875 billion, the world's largest, and fueled an investment boom that has driven prices of metals to record levels and threatens to fan inflation.

Henry M. Paulson Jr., who was sworn in as Treasury secretary yesterday, called for faster currency gains to redress a growing trade imbalance. Many U.S. lawmakers and manufacturers are proposing sanctions against Chinese goods.

"A high trade surplus is not in China's own interest," said Jonathan Anderson, chief Asia economist at UBS AG in Hong Kong. "They should continue to move to let the yuan appreciate faster."

The central bank in April raised lending rates, and in June ordered banks to set aside more reserves. The central bank also has sold domestic bonds to remove cash from the banking system and pledged to gradually loosen currency controls.

Besides driving up prices of raw materials and inflation, excessive investment threatens to leave China with idle factories, squeezing company profits, the central bank said last month.

Premier Wen Jiabao has publicly rebuked commercial banks for extending too much credit for investment projects.

Exports rose 23 percent from a year earlier to $81.3 billion while imports climbed 19 percent to $66.8 billion, the Commerce Ministry reported.

The surplus in China, the world's fastest-growing major economy, reached $61.5 billion in the first half of 2006, up 55 percent from first six months of last year.

"We expect this will further stress relations with the U.S., especially as the trade surplus will continue widening in the second half" as the holiday shopping season approaches, said Ben Simpfendorfer, an economist at Royal Bank of Scotland in Hong Kong.

The surplus has caused a buildup of China's foreign currency reserves, which doubled in the two years through March, overtaking Japan's as the world's largest. China may report June reserves as early as this week.

Economists Grace Ng, at JPMorgan Chase & Co. in Hong Kong, and Hong Liang, at Goldman Sachs & Co. in Hong Kong, say China should let its currency appreciate faster to curb the gap, which would help limit foreign-currency inflows.

The yuan has gained only 1.5 percent against the dollar since China revalued it last July, lagging behind gains in other Asian currencies.

"We're getting close to a year after the revaluation, and the market is very interested in whether China will mark the anniversary with some new currency announcement," said Huw McKay, an economist at Westpac Banking in Sydney, Australia.

The yuan weakened 0.05 percent to 7.9900 per dollar as of 9:35 p.m. in Shanghai.

In addition to flooding China's economy with cash, the swelling trade surplus also risks causing a clash with the U.S., the top destination for Chinese goods.

The U.S. National Association of Manufacturers voted last month to back a proposal for duties on Chinese imports. China's record $201.6 billion trade surplus with the U.S. last year sparked calls from Congress for laws to punish Beijing for keeping the yuan undervalued.

The surplus won't shrink in the "near term," Zhang Lichuan, head of the customs bureau's statistics department, said last month. The expanding gap between the two nations will increase pressure on the yuan to rise, he said.

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