China exports up 44 percent in spite of global fears

Beijing, China (FT.com) -- China defied widespread fears about a new slowdown in the global economy to record another surge in exports last month compared to the same period last year, although the figures will also draw attention again to whether the Chinese currency remains undervalued.

A 44 percent increase in exports last month year-on-year led China to rack up another large monthly trade surplus in June, the $20 billion result adding to the surplus of $19.5 billion in May, which could indicate that China's external surplus might balloon again in the second half of the year.

The Chinese central bank announced on June 19 that it was abandoning a near two-year peg to the U.S. dollar. The renminbi has since appreciated 0.77 percent against the dollar.

The Obama administration responded by refraining from labeling China as a "currency manipulator" in a report released last week, although it said the renminbi "remains undervalued".

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The June figures showed no signs of an expected slowing in global growth that has gripped investors, with exports to Europe increasing a higher-than-expected 43 percent, year-on-year, and to the U.S. 44 percent. In dollar terms, exports increased from $131.76 billion in May to $137.39 billion.

"China's trade account [is] continuing to defy gravity," said Tom Orlik, an economist at Stone & McCarthy in Beijing. "A resurgent trade surplus will clearly strengthen the argument for rapid appreciation of the renminbi."

Exports of steel -- one of the most politically sensitive sectors -- increased another 14 per cent in June over the month before to 5.6 million tones, although the government did announce in late June an end to export tax rebates for steel and other metals.

Imports grew 34.1 percent in June, year-on-year, down from the 48.3 percent expansion seen in May, which could be an indication that measures to slow the property market were already having an impact on investment in China.

More signs of domestic slowing were evident in other figures released over the weekend, including the M2 measure of money supply whose rate of growth fell to 18.5 percent in June, year-on-year, from 21 per cent in May and 29.7 percent in November.

China's foreign exchange reserves rose only by a relatively modest $7.1 billion in the second quarter to $2,454 billion -- compared to an increase in the whole of last year of $453 billion.

The muted increase was partly explained by a steep drop in the dollar value of China's euro assets, however economists said it could also reflect a significant capital outflow over the period as expectations about currency appreciation were scaled back.

Before the financial crisis, China was running a current account surplus well above 10 percent of GDP. However, the level of the surplus has dropped sharply over the past year -- including a trade deficit in March -- which allowed the authorities to deflect some of the international criticism about the level of its currency.

Going forward, analysts believe that imports could slow further as the property market clampdown and efforts to control borrowing by local governments for infrastructure projects will restrain the demand for imported raw materials.

As a result, the trade surplus is likely to be higher in the second half of the year, although the increase could be held in check if slowing economies in Europe and the U.S. eventually start to cut demand for Chinese exports.

© The Financial Times Limited 2010