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China's January Trade Surplus Hits $15.88 Billion

China posted a chunky trade surplus for January of $15.88 billion, propelling the rolling 12-month total to a record high.

The figures came on the heels of a renewed call by Group of Seven finance ministers and central bank chiefs on Saturday for China to let its currency's exchange rate rise to help reduce its current account surplus.

The trade surplus, announced by the customs administration, was down from $21.0 billion in December but dwarfed the January 2006 total of $9.5 billion. Economists polled by Reuters had expected a surplus of $15.4 billion.

Chinese trade flows can be distorted at the start of the year by the timing of the Lunar New Year holidays, which fall in February this year but started in late January in 2006.

But the rolling 12-month surplus confirmed the strong underlying trend. It increased to $183.9 billion in January from $177.47 billion in the 12 months through December.

Exports in January were up 33.0% from a year earlier, while imports grew 27.5%, beating forecasts of 26.5% and 18.5%, respectively. "Export growth is still quite fast. If it remained at that rate for the rest of the year, that would be really worrying," said Lin Songli, an analyst at
Guosen Securities in Beijing.

Noting that January's surplus is usually very low compared with that in other months, Lin said: "I think the monthly surplus will easily exceed $20 billion starting from March or April." Jun Ma, an economist with Deutsche Bank in Hong Kong, said exports were strong due to the resilience of U.S. demand and to deep-seated improvements in the performance of Chinese exporters that were enabling them to cope better with a stronger yuan.

China has allowed the yuan to appreciate by around 4.6% since it revalued the currency by 2.1% in July 2005. Although the pace of appreciation has picked up in recent weeks, critics say the currency remains vastly undervalued, giving Chinese exports an unfair advantage in global
markets.

In a variation on its usual theme, the G7 told China on Saturday that it was not enough simply to let the yuan rise against the dollar. What counted, the group said, was a rise in the average value of the yuan against the currencies of China's trading partners. This "effective" rate has barely changed since July 2005.

Apart from sparking political problems for China, the torrent of money generated by the trade surplus complicates the conduct of monetary policy. To mop up the excess cash, the People's Bank of China has increased banks' reserve requirements four times since the summer and stepped up its sale of bills.

The central bank's headaches would not go away despite the drop in the surplus from December, economists said.

"The momentum of an increasing trade surplus and the resulting pressure on monetary policy still persist," said Li Huiyong, an analyst at Shenyin & Wanguo Securities in Shanghai.