China Exports May Slow, Fueling Calls to Limit Yuan

By Li Yanping

July 9 (Bloomberg) -- China's export growth probably slowed last month, giving more ammunition to manufacturers calling for the government to slow the pace of the yuan's gains.

Overseas shipments climbed 22 percent from a year earlier after gaining 28.1 percent in May, according to the median estimate of 23 economists surveyed by Bloomberg News. The data may be released as early as today.

Rising raw-material, energy and labor costs and a 6.6 percent gain in the yuan versus the dollar this year have squeezed profits, just as the outlook for demand abroad weakens, exporters say. More than 2,000 shoemakers closed in Guangdong province, the world's largest footwear production center, in the five months through May, according to the customs bureau.

``Slowing exports will cool economic growth and hit some exporters hard, so the political pressure on the government to stop the yuan's appreciation will increase,'' said Stephen Green, the Shanghai-based head of China research for Standard Chartered Bank Plc.

Any effort to restrain the yuan may provoke China's biggest trading partners. The nation was a target of criticism on trade imbalances from the Group of Eight leaders, meeting in Japan this week.

In language that French President Nicolas Sarkozy said was aimed at China, the G-8 called for a ``necessary adjustment'' in exchange rates ``in some emerging economies with large and growing current-account surpluses.''

Smaller Surplus

China's trade surplus likely narrowed to $22.7 billion from $26.89 billion a year earlier as rising prices for oil, coal and iron ore boosted import costs. Imports probably climbed 36.2 percent, easing from a 40 percent gain in May.

Almost a third of 70,000 Hong Kong-invested factories in China's Pearl River Delta may close or move out this year as higher costs and cuts to export incentives bite, according to Danny Lau, chairman of the Hong Kong Small and Medium Enterprises Association.

``Conditions are extremely difficult,'' Lau said yesterday. ``The renminbi's appreciation is the major factor,'' he said, using another name for China's currency.

Growth in overseas shipments eased to 22.9 percent in the first five months, from 25.7 percent in all of last year, as demand in the U.S., China's second-largest export market, weakened. May's surge in exports may have been because a shortened holiday added three working days to the month compared with a year earlier.

Touring Exporters

Premier Wen Jiabao and Vice Premier Wang Qishan last week visited exporters in Jiangsu, Shanghai and Shandong, listening to their concerns and urging them to become more competitive, the state-run Xinhua News Agency said.

China aims to use currency appreciation to purge exporters who add little value to the economy, Andy Rothman, a Shanghai- based China strategist at CLSA Ltd., said in a report in May. Standard Chartered's Green said yesterday that while exporters highlighted yuan appreciation, weaker overseas demand was the key reason for slower export gains.

This year's appreciation in the yuan has been faster than the 7 percent pace in 2007, cutting import costs and helping government efforts to tame inflation that jumped to a 12-year high of 8.7 percent in February.

The yuan has climbed 20.7 percent versus the dollar since a fixed exchange rate was scrapped in July 2005.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net