China June import growth weakest in 20 months

The substantial drop in June import growth, which decelerated to a 19.3 percent annual pace from May's 28.4 percent, is bound to heighten investor concerns about how swiftly the world's second-largest economy is slowing.

But, coming a day after data showed June inflation hit a 3-year peak, analysts took the jump in the trade surplus as a sign that China might have to raise rates further, both to rein in prices and to combat capital inflows.

"The trade surplus surged in June," said Liu Li-Gang, an economist with ANZ. "We would interpret this to mean the moderation in export and import growth is not big enough to prevent the government from tightening further."

"The big trade surplus means PBOC will continue to experience large capital inflows. The PBOC will have to address this inflow problem, so it's unlikely they will pause monetary policy."

A slew of indicators in the past few weeks have pointed to a moderation in the heady pace of China's growth, from purchasing manager surveys of new orders to Taiwan's exports to the mainland.

But the People's Bank of China has made clear inflation remains a priority for policy. Most analysts agree the resultant growth from that policy mix will be slower than the near double-digit pace of the past few years but there is little risk of a hard landing.

The government is due to announce second-quarter economic growth data on Wednesday.

"Imports were below expectations," noted David Cohen, an economist at Action Economics in Singapore. "We are perhaps seeing some reflection of loss of momentum in China's growth. After all, there has been tightening in policy.

"The numbers are consistent with decelerating growth, with the soft landing that many people are looking for."

Last week, the central bank raised interest rates for the third time this year, underlying the government's confidence in the economy's ability to cope with tighter monetary policy.

Sunday's data showed June exports rose 17.9 percent from a year ago, slowing from a 19.4 percent rise in May and pointing to the weakness in overseas demand that has seen exports and new orders soften across most of Asia.

Exports hit a record high of $162 billion in June, while imports for the month were $139.7 billion. That left the country with a trade surplus of $22.3 billion in June, compared with $13.1 billion in May.

The median forecast of economists polled by Reuters was for exports to rise 18.7 percent and imports to grow 25.0 percent, resulting in a trade surplus of $16.3 billion.

On a calendar-adjusted basis, exports expanded 16.4 percent in June from a year earlier, while imports jumped 19.2 percent, the customs agency said.

Exports rose 3.1 percent in June from May, while imports fell 3 percent month-on-month. On a calendar-adjusted basis, June exports rose 4.2 percent from May, while imports fell 2.6 percent from May.

Copyright Reuters, 2011