Tuesday, January 8, 2008

China's Trade Surplus to Rise as Exports Resist Safety Concern

By Li Yanping

Jan. 9 (Bloomberg) -- China's trade surplus probably swelled in December, surging to a record for the year, as the nation's export growth maintained momentum in the face of concern that some products are unsafe.

The trade gap rose 16 percent to $24.4 billion in December from a year earlier, according to the median estimate of 21 economists surveyed by Bloomberg News. Exports climbed 23 percent in December, after a 22.8 percent gain in November, it showed. The data may be released as early as today.

The figures are likely to demonstrate the strength of demand for China's cheap clothing, shoes and mobile phones even after exports of tainted seafood and deadly pet-food ingredients, and product recalls by Mattel Inc., spurred boycott calls.

With the economists predicting the surplus will surge to a record $263 billion for 2007, China's government will still face pressure to allow its currency to appreciate faster.

``Product safety is an excuse for trade protectionism,'' said Zhu Baoliang, chief economist at the State Information Center in Beijing. ``The currency is the most important tool to narrow the trade surplus because it can directly adjust import and export prices.''

A stronger yuan would slow demand for exports and cool inflation by making imports cheaper.

Zhu said the government should allow the yuan to rise 5 percent a year against a basket of currencies, not just the dollar. The State Information Center is linked to the National Development and Reform Commission, China's top planning agency.

Inflation, Stock Prices

The trade surplus has flooded the world's fourth-largest economy with cash, fueled inflation to the fastest in 11 years and fanned asset-price gains. The CSI 300 Index of stocks soared 162 percent last year and property prices climbed at the fastest pace in two years in November.

Government policy makers last month named inflation and the risk that the economy will overheat as its two main concerns for 2008 and said the People's Bank of China would pursue a ``tight monetary policy.''

China's export growth may have actually accelerated in December as some companies rushed out shipments before a round of export tax increases for energy-intensive and polluting products came into effect on Jan. 1. Eight of the 21 economists predict December's shipment expansion will be 24 percent or more.

From January, export growth may slow as the housing recession cools the economy in the U.S., China's biggest trading partner after the European Union.

A 1 percentage point slowdown in the U.S. economy's expansion would trim China's export growth by 4 percentage points and directly reduce gross domestic product by 0.5 percentage point, according to Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong.

`Outlook Darkens'

``The outlook for China's exports is darkening, as a result of faster currency appreciation and the cumulative effects of all the tax policies introduced to slow export growth,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc.

China's currency advanced 7 percent against the U.S. dollar in 2007, twice as fast as in 2006. Against the euro, the yuan dropped 4.3 percent.

Slowing growth in exports may expose China's overcapacity, according to Sun. China's soaring exports have provided the nation's banks with cash that has been funneled into the building of thousands of factories.

``An export led slowdown would reveal the overcapacity, leading to an inventory buildup and aggressive price cuts in the second half of the year,'' Sun said. Both would ``undermine firms' profitability and ability to repay bank loans.''

The trade surplus may continue to widen because import growth could also slow as the government's measures to prevent the economy from overheating begin to take effect. The central bank raised interest rates six times last year and ordered banks to increase the amount of money they set aside as reserves on 10 separate occasions.

Lehman Brothers forecasts the yuan will appreciate about 7 percent against the dollar in 2008.

Imports probably grew by 25.5 percent in December, compared with 25.3 percent in November, according to the survey.

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