Strong China trade points to more pressure on yuan

China's export growth moderated a bit in September, but pressure to revalue its currency probably won't. The quarterly trade surplus was at its highest since 2008, and China's massive pile of foreign exchange hit $2.6 trillion. These numbers set China up for some tough questions at November's G20.

Record monthly imports show that China is growing strongly. The total value of imports gained 16 percent on a month-on-month basis. Higher commodity prices helped. But imports for products destined for processing and re-export grew at a slower pace than total imports, according to Chinese Customs data, supporting the theory that domestic demand is starting to drive the economy.

Still, the surplus looks here to stay. Even as exports of low-value products grow more slowly than they had before -- clothing at 19 percent in the first nine months of the year, for example -- China is moving into exports with more momentum, like solar power equipment. Machinery exports grew 36 percent over the same period.

Politicians in the United States loudly blame their economic problems on the cheap yuan, and use strong Chinese trade data to support their case. But the rest of the world is now watching closely too. In fact, the yuan has risen 2 percent against the dollar since June 30, but has fallen about 12 percent against the euro, 6 percent against the yen, and 9 percent against the Korean won.

China's foreign reserves will attract further attention. They grew by $200 billion in the quarter, to $2.6 trillion. Part of that may reflect the rise in the value of euro and yen holdings, which increase the dollar value. But it will also fuel suspicion that the Chinese government is buying up a lot of dollars to keep the yuan low.

The stellar performance of China's trade may be cause for celebration at home. But less fortunate trade partners will see it as a sign that the yuan needs to play catch-up. When the G20 leaders meet in Seoul next month, expect these numbers to be at the top of their minds.

[Source: By Wei Gu, Reuters, Hong Kong, 13Oct10]

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