China Trade Surplus Grows; Producer Prices Climb 10%

By Nipa Piboontanasawat and Kevin Hamlin

Aug. 11 (Bloomberg) -- China's trade surplus unexpectedly widened in July and producer prices rose at the fastest pace in 12 years, adding pressure on the government to let the yuan resume its appreciation.

The surplus climbed 4 percent to $25.3 billion from a year earlier, the first gain in four months, customs bureau figures showed. Factory-gate prices increased 10 percent, the statistics bureau said earlier today.

The benchmark stock index slumped the most in six weeks on concern higher raw-material and energy costs will erode earnings. China halted the yuan's gains and eased lending curbs last month, putting a bigger emphasis on economic growth than fighting inflation as export demand cooled.

``The weakness in exports was always exaggerated,'' said Ben Simpfendorfer, an economist with Royal Bank of Scotland Plc in Hong Kong. ``Producer prices are showing serious inflationary pressures. We expect the pace of yuan appreciation to accelerate.''

The yuan rose 0.02 percent to close at 6.8577 at 5:30 p.m. in Shanghai after the trade numbers were released, reversing an earlier decline. The currency has fallen 0.1 percent against the dollar this quarter after gaining 4.2 percent in the first quarter and 2.3 percent in the second.

The CSI 300 Index fell 5.2 percent to an 18-month low. The gauge has tumbled 54 percent this year after more than doubling in 2007.

Surprise for Economists

The trade surplus and the 26.9 percent increase in exports to $136.7 billion topped the estimates of all 16 economists in a Bloomberg News survey. Overseas shipments grew a revised 17.2 percent in June. Imports increased 33.7 percent in July to $111.4 billion, up from 31 percent.

``Higher valued-added exports such as electronics products are showing more resilience than expected,'' said Glenn Maguire, chief Asia-Pacific economist at Societe Generale in Hong Kong. ``We are seeing that the global economy hasn't been as weak as some of the recent data has suggested -- we're only just starting to see the external environment turn challenging.''

Exports to the U.S. rose 9.9 percent in the first seven months of 2008 from a year earlier after gaining 8.9 percent in the first half. Those to the European Union increased 27.1 percent after climbing 27 percent. Shipments to Japan rose 15.9 percent after increasing 15.1 percent.

Yuan Estimate

The yuan has gained 18 percent against the dollar in the past three years. It's likely to strengthen 3.6 percent to 6.63 against the dollar in the second half of the year, according to the median estimate of 25 analysts surveyed by Bloomberg.

Officials and manufacturers in the U.S. and Europe say the currency is kept artificially weak to help exporters.

U.S. Treasury Secretary Henry Paulson, writing this month on the Web site of Foreign Affairs magazine, said yuan strengthening still has ``much further to go.'' Of the advance since a fixed-exchange rate ended in July 2005, Paulson said 70 percent has come about since he initiated semiannual economic talks with China in 2006.

Weaker gains help exporters by keeping their products cheaper in overseas markets, while stronger appreciation counters inflation by lowering import costs.

The government has raised export tax rebates for garments and textiles to protect jobs after economic growth slowed for a fourth quarter to 10.1 percent in the three months through June. China is still the fastest-growing of the world's 20 biggest economies.

10 Million Jobs

Gross domestic product growth below 9 percent would be ``unacceptable'' for a government targeting 10 million new jobs a year, according to a Credit Suisse Group report this month.

Statements last month by the central bank and the Politburo, the Communist Party's top decision-making body, suggested a shift toward growth rather than taming inflation that climbed to a 12-year high of 8.7 percent in February. The statements omitted previous references to a ``tight'' monetary policy.

The increase in factory-gate prices signaled a squeeze on manufacturers' margins and ``high'' inflation pressures, said Ting Lu, an economist with Merrill Lynch in Hong Kong.

SAIC Motor Corp., China's biggest domestic automaker, tumbled 75 percent in Shanghai trading this year, partly on concern that margins are shrinking. China's stockpile of unsold new vehicles reached a four-year high at the end of June.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net