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China Trade Surplus Hits $21.4 Billion, Exports Slow

China recorded a smaller-than-expected trade surplus of $21.35 billion in June, as slower growth in exports contributed to concerns that weakening demand overseas could be starting to hit the economy.

The surplus marked an increase from $20.2 billion in May, but it was significantly smaller than the $26.9 billion surplus recorded in June 2007 and undershot economists' expectations of a $22.4 billion gap.

China, Chinese Flag
CNBC.com
China, Chinese Flag

Notably, exports rose just 17.6 percent from a year earlier in June, slowing from 28.1 percent in May. Economists had expected export growth of 23.4 percent.

Analysts said the slowdown could add to existing worries about the export sector as global demand wanes, and feed into increasingly vocal calls to do something about it.

"Expectations of a relaxing of policy will be strengthened, especially for an increase in export tax rebates for some sectors," said Ma Xiaoping, an analyst with HSBC in Beijing.

Those concerns have been highlighted over the past week by visits by top leaders to major exporting centres and state media reports that Beijing is planning to backpedal on existing policies aimed at curbing some exports, by raising tax rebates that it only recently cut on exports of goods such as textiles.

Analysts said the latest figures could also add to resistance against further appreciation of the yuan, or renminbi (RMB). Producers say a stronger currency has contributed to their woes in the face of softer global demand.

The yuan has strengthened by more than 18 percent since it was revalued in July 2005, after a period of relatively rapid appreciation in the first half of this year. It was trading at 6.8464 per dollar on Thursday, after the central bank set its mid-point at the highest level since the landmark revaluation.

More Debate on Yuan

The surplus for the first half as a whole reached $99.0 billion, down nearly 12 percent from a year earlier.

The 12-month rolling surplus fell to around $249.1 billion from $254.7 billion in May, providing further evidence that China's overall trade surplus is cresting after three years of explosive growth. It was $262.2 billion in 2007.

The surplus in June would have been even smaller had it not been for weaker-than-expected growth in imports. Imports rose an annual 31 percent in June, slowing from 40 percent in May and compared with expectations of a 35 percent rise.

The Customs Administration said in a statement that non-processing trade saw a noticeable decline in its trade surplus during the first half because of a significant increase in imports, which has coincided with soaring prices for energy and commodities.

"As export growth slows and the trade surplus narrows -- and also as there have been signs of easing inflation in recent months -- we judge that the pace of the RMB appreciation will slow significantly in the second half as compared to the 12 percent annualized pace in H1," Mingchun Sun with Lehman Brothers in Hong Kong said in a research note.

Zheng Xinli, vice head of the Communist Party's policy research office, said in comments published on Thursday that China should slow the appreciation of the yuan to give exporters time to adjust.

"We are not the Asian tigers," Zheng said. "We need time to upgrade the structure and to handle the pressure."

Others differed, saying there was plenty of room for further strengthening of the currency.

"This shrinking trade surplus is one factor contributing to the slowdown of the economy," analysts with BNP Paribas said in a note to clients.

"Nonetheless, with the trade balance and investment flows remaining strong, we continue to argue for further appreciation in the RMB exchange rate," they wrote.