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Monthly Trade Surplus Hits Record High
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China's trade surplus surged to a record US$23.8 billion in October as imports slowed and exports further accelerated, putting more pressure on the yuan's appreciation and ballooning foreign exchange reserves.


Compared with US$15.3 billion in September, the latest surpassed most economists' forecasts. Exports jumped 29.6 percent and imports rose 14.7 percent, statistics from the customs office showed yesterday. Trade surplus reached US$133.6 billion in the first 10 months of the year, almost a third higher than last year's total.


According to Stephen Green, senior economist with Standard Chartered Bank, the government's measures to slow down domestic fixed-assets investment is the underlying reason for the slackening of imports which have grown at their slowest pace since July 2005.


"On a first look, a stronger renminbi should favor importers by making their purchases cheaper, but this seems not to have happened yet or is being disguised by other effects," Green said.


"Import growth may have slumped because of the government's restraint on investment, which caused economic expansion to slow in the third quarter for the first time in more than a year."


Green believes the more regulators control investment, the lower imports of investment goods will be, which will further exacerbate the external imbalance. For instance, oil imports kept rising at 14 percent year-on-year despite lower global prices.


Wang Qing, head of Greater China research at Bank of America Corp, said the slowdown in import growth is responsible for the huge surplus and it shows the impact of the government's macroeconomic control measures, which has slowed investment growth.


On the other hand, the extraordinary widening of China's trade surplus in October is partly due to the impending Christmas shopping spree. Retailers in the US, Europe and across Asia stock up on Chinese-made electronics and toys ahead of this traditionally busy shopping season.


The swelling trade surplus, however, means more pressure on further yuan appreciation.


The yuan has risen 3.1 percent against the US dollar since China ended a currency peg to the US dollar in July 2005 and allowed it to trade 0.3 percent on either side of the dollar on a daily basis.


China's foreign exchange reserves, fuelled by a burgeoning foreign trade surplus and massive inflow of foreign direct investment (FDI), overtook Japan's to become the world's largest in February and is to date in excess of US$1 trillion.


In fact, reserves could very well double to hit US$2 trillion by late 2010, according to Ba Shusong, a researcher with the Development Research Center of the State Council.


Such huge reserves will make the country more susceptible to foreign exchange rate fluctuations, experts say.


Although some economists suggest that part of the reserve should be used to boost the country's pension funds, Wu Xiaoling, vice-governor of the People's Bank of China, does not agree with that plan. "Foreign exchange reserves are an item on the central bank's balance sheet," she said last month.


"Whoever wants to use our reserves will have to use yuan to buy them from the central bank because we spent money buying them."


(China Daily November 9, 2006)


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