China's Exports Cool, Add Pressure to Slow Yuan Gains

By Li Yanping and Nipa Piboontanasawat

July 10 (Bloomberg) -- China's export growth cooled in June, putting the government under more pressure to slow gains by the yuan to protect manufacturers.

Overseas shipments grew 17.6 percent from a year earlier, after gaining 28.1 percent in May, the customs bureau said on its Web site today. That was less than the 22 percent median estimate of 23 economists surveyed by Bloomberg News.

China has more than doubled the pace of the yuan's appreciation versus the dollar this year, helping to restrain the fastest inflation since 1996. Premier Wen Jiabao can't satisfy both manufacturers complaining about a profit squeeze and trading partners who deem the yuan undervalued and a cause of global trade imbalances.

``Faster currency gains hurt exporters already squeezed by raw-material and labor costs and taxes,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``The government needs to sustain growth and create jobs -- it's an issue of social stability.'' He expects the yuan's appreciation versus the dollar to slow to 2 percent for the rest of the year after a 6.6 percent increase so far.

The trade surplus narrowed 20.6 percent to $21.4 billion from a year earlier, according to the government, the third straight reduction. Imports climbed 31 percent from a year earlier, after a 40 percent increase in May.

Export growth is down from last year's 25.7 percent increase. The weaker performance ``is closely linked to the global economic slowdown, led by the U.S. economy,'' Wang Tao, a Beijing-based economist with UBS AG, said in a July 2 report.

U.S. Slowdown

The World Bank forecasts the U.S. economy will expand in 2008 at half the pace of last year and global economic growth will slow to 2.7 percent from 3.7 percent.

Standard Chartered Plc said in a report last month that ``worries about exports'' were fueling opposition within the government to yuan appreciation, which makes exporters' products more expensive and less attractive overseas.

Wen and Vice Premier Wang Qishan last week visited exporters in Jiangsu, Shanghai and Shandong, urging them to become more competitive, the state-run Xinhua News Agency said. Tax rebates on textile and garment exports may increase this month to help companies cope with currency gains and weakening demand, the China Securities Journal reported yesterday.

The yuan has gained 21 percent against the dollar since a fixed exchange rate was scrapped in 2005. It has risen 14 percent against the yen and fallen 7 percent versus the euro.

`Obviously' Undervalued

International Monetary Fund Managing Director Dominique Strauss-Kahn this week described the yuan as ``obviously substantially undervalued,'' while the Group of Eight nations signaled that they're seeking gains in currencies of countries with trade surpluses.

China's economy has slowed each quarter since expanding 11.9 percent, the fastest pace in 12 years, between April and June last year. Second-quarter gross domestic product is due to be announced July 17 after a 10.6 percent expansion in the first three months. Inflation was 7.7 percent in May.

``Growth is likely to outweigh inflation as the top priority toward the end of the year, leading the government to loosen monetary policy,'' said Lehman's Sun. ``The outlook for exports is darker for the rest of the year and the decline in economic growth will become steeper.''

In the first six months, exports grew 21.9 percent and imports rose 30.6 percent from a year earlier. The first-half trade surplus fell 11.8 percent to $99 billion from a year earlier.

May's surge in overseas shipments may have been because a shortened holiday added three working days to the month compared with a year earlier.

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