China Trade Surplus Likely to Narrow for Fourth Month

By Nipa Piboontanasawat

Aug. 8 (Bloomberg) -- China's trade surplus probably fell for a fourth straight month, increasing the likelihood of more government measures to sustain the economy's expansion rather than stamp out inflation.

The gap narrowed 17 percent to $20.25 billion in July from a year earlier, according to the median estimate of 16 economists surveyed by Bloomberg News.

China has loosened bank lending quotas, raised tax rebates for some exports and halted gains by the yuan to help manufacturers and small businesses as the world's fastest- growing major economy shifts down a gear. President Hu Jintao, hosting the Olympic Games from tonight, said Aug. 1 that the country needs to maintain ``steady and fast'' growth.

``The government has little choice but to loosen policies to protect company profits and employment,'' said Liao Qun, chief economist at Citic Ka Wah Bank in Hong Kong. ``China will probably keep slowing the pace of currency appreciation in the second half and announce more measures to help businesses.''

Inflation may have cooled to the slowest pace in seven months in July, allowing policy makers to put a bigger emphasis on stimulating the economy.

Consumer prices rose 6.5 percent, less than the 7.1 percent increase in June, according to the median estimate of 17 economists. The government is due to release the trade and inflation figures next week.

Export Growth May Slow

Exports may have climbed 16.8 percent in July from a year earlier, the least in five months, as the U.S. housing recession and global credit squeeze crimped demand.

Imports gained 27.2 percent, the Bloomberg News survey showed, down from 31 percent in June.

Frederic Neumann, an economist at HSBC Holdings Plc in Hong Kong, said yesterday that a plunge in the growth of Taiwan's shipments to China may signal a looming Asian export slowdown. Shipments from the island to the mainland rose 4 percent in July after a 25.5 percent increase in June.

China's economy slowed for a fourth straight quarter in the three months to June 30, expanding 10.1 percent. GDP 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. Neither used the previous language of a ``tight'' monetary policy.

`Tilting Toward Growth'

``As the Chinese economy moderates, official priorities are tilting towards maintaining growth and employment,'' said Jing Ulrich, JPMorgan's chairwoman of China equities. China will use fiscal policies to support exporters and smaller companies during the rest of the year, she said.

A government research report published today was more optimistic.

GDP growth may accelerate in the third quarter to 10.2 percent as industrial production quickens and Sichuan province rebuilds after the May 12 earthquake, the State Information Center said.

The yuan's gains against the dollar slowed from 4.2 percent in the first quarter to 2.3 percent in the three months through June. The currency has fallen 0.1 percent this quarter and was headed today for its third weekly loss, trading at 6.8622 against the dollar as of 11:27 a.m.

A weaker yuan makes China's products cheaper for overseas buyers, while boosting the cost of imports.

Textile, Garment Exports

China raised tax rebates on exports of textiles and garments to 13 percent from 11 percent from Aug. 1 to aid manufacturers also facing rising labor and raw-material costs. Textile exporters Jiangsu Sunshine Co. and Luthai Textile Co. said this month that the change will boost profits.

The People's Bank of China increased commercial banks' lending quotas for 2008 by 5 percent last month to aid small and medium-sized businesses and farmers, according to a central bank official and a bond trader briefed by the central bank. Neither would be identified because they weren't authorized to comment.

The central bank has kept interest rates unchanged at a decade high this year, while ratcheting up the proportion of deposits that banks must set aside as reserves to a record 17.5 percent.

The key one-year lending rate is 7.47 percent.

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