China Probably Had Record $12 Billion Trade Surplus

Bloomberg
Jun. 09, 2006

June 9 (Bloomberg) -- China probably had a record $12 billion trade surplus in May, adding pressure on the government to encourage imports and let its currency appreciate faster.

The gap widened from $10.46 billion in April and $9 billion a year earlier, according to the median forecast of 21 economists in a Bloomberg News survey. That would bring the surplus for the first five months to $45.8 billion, up 53 percent from a year earlier. Figures may be released as early as June 10.

The yuan has dropped 0.1 percent against the dollar since April 21, when the Group of Seven industrial nations said it should be allowed to gain to help reduce a record U.S. trade deficit. While finance ministers at a meeting in Russia this week may repeat that demand, a rising yuan alone would do little to alleviate imbalances in global trade flows, economists said.

``China's been under a lot of pressure to raise the yuan's value, but there's an increasing recognition that trade isn't as sensitive to exchange rates as it was even two or three years ago,'' said Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong.

Increased global competition deters companies from raising prices to compensate for currency fluctuations, limiting the impact of exchange rates, according to recent studies by economists at the Federal Reserve and the Bank for International Settlements.

On April 21, the G-7 said it is ``critical'' that China let the yuan advance, stating for the first time a desired direction for the currency. Since then, the dollar has dropped almost 4 percent against the euro. China in July last year revalued the yuan by 2.1 percent against the dollar and allows it to fluctuate as much as 0.3 percent daily versus the U.S. currency.

Import Growth

Global trade imbalances shouldn't be addressed only through the adjustment of exchange rates, Japan's Finance Minister Sadakazu Tanigaki said on June 2. ``We would deviate from the right track if we depended on the adjustment of currencies alone,'' Tanigaki told reporters in Tokyo.

China's imports probably rose 21.2 percent from a year earlier in May, after growth slowed to 15.3 percent in April, the survey showed. Imports in the first quarter jumped 24.8 percent, double the pace of the same period last year, as the nation bought more oil from overseas and crude prices surged.

The economy grew 10.3 percent in the first quarter, the most among the world's major economies. That expansion is driving demand for imports ranging from raw materials to crude oil. Chinese companies are also importing more semiconductors and components for exports of assembled electronics.

U.S. Pressure

Exports likely climbed 24.2 percent from a year earlier, little changed from April's gain. Growth in overseas sales slowed to 26.6 percent in the first quarter from 34.8 percent a year earlier, as textile quotas imposed by the U.S. and European Union last year slowed shipments of clothing and shoes.

Money supply growth in China accelerated in May from April, the Shanghai Securities News said today. That indicates a widening trade surplus for the month, said BNP Paribas Peregrine economist Chen Xingdong.

China's trade surplus tripled to a record $102 billion last year as wages that are a fraction of those in the U.S. and Europe gave exporters an edge. The U.S. trade deficit with China rose 12.6 percent to $47.3 billion in the first quarter, accounting for almost a quarter of its total shortfall.

U.S. lawmakers have blamed global trade imbalances, including the record U.S. current account deficit, on China's reluctance to let its currency appreciate more. Concern about the U.S.'s ability to finance its shortfall helped push the dollar lower this year.

The U.S. Treasury drew criticism from both Democrats and Republicans for failing to brand China a currency manipulator in a May 10 report.

`Collaboration, Not Confrontation'

Senate Finance Committee Chairman Charles Grassley, an Iowa Republican, said on June 5 he expects Henry Paulson, President George W. Bush's nominee for U.S. Treasury secretary, to be ``very aggressive'' in pushing for China to make its currency more flexible. Paulson is chief executive of Goldman Sachs Group Inc.

Senator Charles Schumer, a New York Democrat, is sponsoring a bill together with South Carolina Republican Lindsey Graham to impose 27.5 percent duties on Chinese goods unless the yuan is allowed to rise. In March, they agreed to delay a vote on the bill until September following a visit to China.

The Bush administration ``realizes the best way to deal with the currency issue is through collaboration, not confrontation,'' said Huang Yiping, an economist at Citigroup Inc. ``But political pressure will return with congressional elections coming up and Schumer's bill due for a vote in September.''

Encouraging Imports

China's leaders say they prefer to encourage imports to reduce the surplus because faster currency gains could bring about a sharp slowdown in the economy, Asia's second-largest.

Commerce Minister Bo Xilai said on May 31 that the yuan's gains, including July's revaluation, have reduced profits at Chinese exporters and hurt foreign companies that make products there for exports.

Premier Wen Jiabao has pledged to boost spending on health care, welfare and education to ease the financial burden on the nation's 1.3 billion people and encourage them to consume. The government has also cut taxes and raised minimum wages.

``China is also trying to improve domestic demand to help increase imports and improve the structure of its trade by encouraging higher value-added exports and curbing exports of cheap goods,'' Citigroup's Huang said.

The following table lists economists' forecasts for May exports, imports and trade surplus in China.