China Sees Growing Challenges as Declining Demand Weakens Exports: Economy

By Bloomberg News - Dec 7, 2011 4:13 PM GMT+0700

China sees an increase in domestic costs and a slowdown in overseas demand putting “severe” pressure on its exports next year, a sign that policy makers may have little appetite to allow faster gains in the yuan.

Premier Wen Jiabao’s embrace of higher wages, along with a jump in land and raw-materials prices and a stronger yuan are restraining shipments, the Commerce Ministry said today. While the nation can achieve export gains as long as Europe’s crisis doesn’t deepen, it will need to focus on strengthening links with emerging markets, Wang Shouwen, head of the foreign trade department, said at a briefing in Beijing.

The yuan weakened last month by the most in more than a year, a shift that may stoke the ire of U.S. lawmakers and presidential candidates who see the Asian nation’s competitiveness as a damper on American job growth. China’s surging trade surplus since joining the World Trade Organization a decade ago has helped the country accumulate a record $3.2 trillion in foreign-exchange reserves and made it the U.S.’s largest overseas creditor.

“The room for yuan appreciation is very limited and the currency will have higher volatility,” said Dariusz Kowalczyk, a senior economist with Credit Agricole CIB in Hong Kong. “It seems China is moving to protect its exporters more aggressively, especially as the external environment deteriorates.”

Yuan Reaction

The yuan was little changed, closing at 6.3643 per dollar in Shanghai today, according to the China Foreign Exchange Trade System.

The recent decline in the yuan’s exchange rate is a “good thing,” Chong Quan, the country’s deputy international trade representative, said at the briefing. It shows the currency is responding to market demand and that China is not manipulating the value of the yuan, he said.

Stocks rose from Tokyo to Sydney as investors speculated European leaders will agree on steps to ease the region’s debt crisis at a summit tomorrow.

The MSCI Asia Pacific Index (MXAP) of equities gained 1.5 percent as of 5:15 p.m. Tokyo time, the seventh advance in eight days. Standard & Poor’s 500 Index futures climbed 0.8 percent. South Korea’s won rose to its strongest level in almost a week, strengthening 0.5 percent to 1,125.95 per dollar in Seoul.

Australia Growth

A report today showed Australia’s economy grew faster than estimated last quarter on consumer spending and mining-driven investment, spurring the local currency as investors pared bets on the pace of interest-rate cuts next year.

Gross domestic product rose 1 percent in the three months ended Sept. 30, after growing a revised 1.4 percent the prior quarter, the fastest pace in four years. The median of 24 estimates in a Bloomberg News survey was for 0.8 percent growth.

Industrial production in the U.K. probably fell 0.7 percent in October from a year earlier, according to the median estimate of economists surveyed by Bloomberg News before a report today. Germany, Europe’s largest economy, may say industrial output rebounded 0.3 percent in October from September, when it dropped 2.7 percent, a separate survey of economists showed.

Consumer borrowing in the U.S. probably rose by $7 billion in October, compared with a $7.4 billion jump the previous month, according to the median estimate of economists surveyed by Bloomberg News before the Federal Reserve releases the figures today.

‘Enough’s Enough’

President Barack Obama last month renewed pressure on China’s foreign-exchange policy and trade practices, saying “enough’s enough” on what the U.S. views as too-slow appreciation of the yuan.

Vice President Xi Jinping told former U.S. Treasury Secretary Henry Paulson yesterday that America should “curb its tendency of politicizing economic issues” to improve the environment for trade and economic cooperation, the official Xinhua news agency reported today. Xi also called for a relaxation in U.S. restrictions on technology exports to China and help for Chinese companies wanting to invest in the world’s biggest economy.

China’s export situation is “quite serious” and growth in shipments in November was slower than the previous month, Mofcom’s Chong said after today’s briefing to release a white paper on foreign trade.

Exports rose 10.9 percent last month from a year earlier, according to the median estimate of 32 economists in a Bloomberg News survey. That would follow a 15.9 percent increase in October which was the slowest pace since gains resumed in December 2009 after the global financial crisis, excluding holiday distortions.

Import Slowdown

China’s trade surplus last month dropped to $15.2 billion from $17 billion in October and $22.9 billion a year earlier, a separate survey of economists showed. Import growth likely slowed to 18.8 percent from 28.7 percent in October, according to another poll. The customs bureau is scheduled to release November trade data on Dec. 10.

China’s trade surplus surged after the nation joined the World Trade Organization in December 2001, rising to a record $298 billion in 2008 from $30.4 billion in the year after accession. The excess has since declined and the customs bureau predicted in October it would drop to $170 billion this year.

A moderating surplus and slower capital inflows, reflected in a drop in net purchases of foreign exchange by the nation’s banks, may ease pressure for the yuan to appreciate. It may also push the People’s Bank of China to make further cuts in banks’ reserve requirements to ensure adequate liquidity in the financial system, according to economists at banks including Standard Chartered Plc and UBS AG.

The government may rein in the yuan’s appreciation in 2012 as export growth moderates amid a global slowdown, according to analysts at Capital Economics and Australia & New Zealand Banking Group Ltd.

Gains may be limited to 3 percent, ANZ said in a report yesterday. Mark Williams at Capital Economics now estimates the yuan will end 2012 at 6.2 per dollar from a previous estimate of 6.1.

--Victoria Ruan. With assistance from Shamim Adam in Singapore. Editors: Nerys Avery, Brendan Murray

To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at vruan1@bloomberg.net

To contact the editor responsible for this story: Ken McCallum at kmccallum4@bloomberg.net