China July exports hit record high, surplus swells

BEIJING: China's exports hit a record high in July as shipments to Europe and the United States proved surprisingly buoyant, allaying concerns that debt problems abroad may hold back the world's No. 2 economy.

But analysts warned it was too soon to declare that Chinese exports can hold up in coming months as debt worries, sluggish consumer spending and now wildly volatile financial markets plague its two biggest customers.

"Both imports and exports are likely to grow at a slower pace in coming months," said Li Xunlei, an economist at Guotai Junan Securities in Shanghai. "The global financial market turbulence may lead to a contraction in external demand."

July exports rose 20.4 percent from a year ago, the strongest gain since April and surpassing economists' median forecast for a 17.4 percent rise, data on Wednesday showed.

Imports were roughly in line with expectations, rising 22.9 percent in July from a year earlier, the General Administration of Customs said. Economists had forecast growth of 22.3 percent.

"China's trade sector is still facing great uncertainties," said Nie Wen, an analyst at Hwabao Trust in Shanghai. "Developed countries are forced to take austerity measures, and emerging markets may tighten (policy) as well to tame inflation."

Indeed, just hours earlier, the US Federal Reserve took the unprecedented step of promising to leave interest rates near zero for at least two more years, painting a gloomy picture for the world's largest economy.

Noting that monetary policy risks are shifting to supporting growth from fighting inflation, China has signalled it may pause its 10-month policy tightening campaign for now.

Wednesday's data suggested sluggishness in the US and European economies has yet to put a big dent in Chinese export growth, as many investors had feared. Instead, robust US and European shipments helped pushed the value of China's monthly exports to a record high of $175.1 billion.

Although annual growth in Chinese exports to the United States in July was marginally weaker than June at 9.5 percent, the total value hit the year's high of $30 billion.

Annual growth of exports to Europe nearly doubled to 22.3 percent, lifting the value of sales to $35.1 billion. Export growth to Japan also picked up sharply.

BHP Billiton , the world's biggest miner, said on Wednesday it expected weak growth in Europe and the United States to persist for many years as they deal with their debt crises, heightening the reliance on China's fast-growing economy.

PRESSURE ON YUAN TO RISE

Other data this week showed that China's inflation hit three-year highs of 6.5 percent in July, and some officials have said that it has likely peaked.

But underlining the fine balance that Beijing has to tread between managing growth and inflation, July's brisk exports caused China's trade surplus to balloon to $31.5 billion, its widest since January 2009.

That could fuel price pressures at home and more criticism from its trade partners abroad that Beijing is keeping its yuan currency suppressed to sell more exports at their expense, allegations China has always denied.

As part of Beijing's policy to prevent the yuan from rising too quickly, it buys dollars earned from trade revenues. But Beijing injects more than 6 yuan into China's banking system for every dollar it buys, adding to a surfeit of cash that fans inflation.

So even if Beijing is reluctant to tighten policy now, it may need to step aside nonetheless to let the yuan climb more briskly if it wants to keep a lid on pirces, analysts said. "China's monetary policy has been kidnapped by foreign capital inflows," said Zhang Lei, an analyst at Minsheng Securities in Shanghai, referring to the widening trade surplus.

"Yuan appreciation is still one important option."

Copyright Reuters, 2011