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China trade surplus surges, fuel for yuan critics in U.S. talks

By Kevin Yao and Aileen Wang

BEIJING (Reuters) - China stormed back to post a hefty trade surplus in April as exports hit a record while imports eased more than expected, weighed down by sustained monetary tightening and high commodity prices.

The surplus of $11.4 billion, nearly four times greater than expected, comes as China holds high-level economic and strategic talks in Washington and could fuel U.S. criticism that Beijing limits the yuan's appreciation to support its exports industry.

The trade account swung from a small, rare trade deficit in the first quarter, pushed by a stronger-than-anticipated 29.9 percent rise in exports over a year earlier to a record $155.7 billion.

Imports climbed 21.8 percent, well short of estimates and analysts were at loggerheads whether this should be read as a sign of surprising weakness in the world's fastest-growing economy or simply deferred purchases because of soaring commodity bills.

"Exports are much stronger, that's the basic thing. Global demand is still pretty strong, a bit stronger than many people feared," said Tao Wang, economist with UBS in Beijing.

"On the import side, we think that commodity exports had been very strongly up until February and there has been quite a bit of inventory build-up. So right now we think it's going through some adjustment."

But Xu Biao, an economist with China Merchants Bank in Shenzhen, said the lower-than-expected imports might contain a much more serious warning.

"Concerns about a slowdown have certainly intensified, and the risks of a worst-case scenario for the Chinese economy, namely a relatively low growth rate and a high inflation, are on the rise," he said.

The median forecast of economists polled by Reuters last week was for exports to rise 29.4 percent and imports to grow 28 percent, resulting in a trade surplus of $3 billion.

On a seasonally adjusted basis, exports rose 35.1 percent in April from a year earlier and rose 12.3 percent from the previous month. Imports gained 27.4 percent year-on-year and 7.4 percent month-on-month, the customs administration said.

China's trade numbers also registered an impact from Japan's earthquake and subsequent nuclear crisis. Imports from Japan were $16 billion in April, down 14.9 percent from March, as production and shipments were interrupted.

WEAK YUAN POLICY

The data showed China's trade surplus with the United States swelled 16 percent to its widest since November.

The data provides fresh ammunition to those U.S. lawmakers who have linked the trade imbalance to China's currency policy, saying a weak yuan gives Chinese manufacturers an unfair advantage in global markets and costs American jobs.

China's overall trade surplus narrowed last year, but that provided little comfort for officials in Washington because the surplus with the United States grew 26 percent to more than $180 billion.

On the first of two days of talks on Monday, the United States pressed China on a range of familiar themes, including that Beijing should push the closely managed yuan up at a faster pace against the dollar.

"This number will likely add to the pressure from Washington for Beijing to allow faster currency appreciation, but more importantly should persuade Chinese policymakers that a stronger yuan can be tolerated by the economy," said Brian Jackson, an economist with the Royal Bank of Canada in Hong Kong.

For its part, China turned aside a chance to openly criticize the loose U.S. monetary and fiscal policies it has argued in the past were weakening the dollar.

China holds about $3 trillion in foreign exchange reserves, of which some two-thirds are estimated to be held in dollar-based assets, so Beijing has a significant stake in the health of the currency.

Higher import costs, along with the government's efforts to rebalance the economy in favor of domestic consumption to reduce reliance on exports, could lead to a smaller trade surplus for 2011 from last year's $183 billion.

Chinese officials hope a smaller trade surplus with the rest of the world could ease criticism from key trade partners over the yuan.

Still, there are plenty of signs that the government is tolerating faster yuan appreciation this year as it seeks to deal with the inflationary impact of rising commodity prices.

China loosened the yuan from a nearly two-year peg to the dollar in June, and this year the People's Bank of China has guided the yuan to record highs. It has now appreciated about 5 percent since June and 1.5 percent since the start of this year.

NO HARD-LANDING

China already is the world's biggest exporter and so has little scope to increase its exports further, while its demand for imports is increasing in leaps and bounds alongside its turbo-charged growth, which last year topped 10 percent.

Investors have long feared an abrupt slowdown in the world's second-largest economy, which could stifle a pivotal source of demand as a global buyer of everything from raw materials to consumer goods as many parts of the world still struggle to emerge from the global financial crisis.

The latest data showed that China, the world's second-largest oil buyer, imported 1.7 percent more oil than a year earlier, bringing in 5.24 million barrels per day in April, the third highest on record on a daily basis.

Imports of copper were much weaker, down nearly 14 percent from March in volume terms. But rather than heralding a sudden drop-off in Chinese economic activity, analysts said the shortfall indicated that firms were shunning high-priced overseas supplies in favor of local producers and stockpiles.

The government sees little sign of a hard-landing in the economy. But it is likely to raise banks' required reserves and interest rates while letting the yuan rise at a faster clip to combat inflation, analysts say.

Inflation hit a 32-month high in March of 5.4 percent, keeping investors expectant of more policy tightening. Figures on Wednesday are expected to show that inflation eased in April to 5.2 percent as food prices, the main pressure behind inflation, are now falling.

"I think over-tightening is the key risk for China. However, it may be too early to call for over-tightening based only on April imports," said Dongming Xie, China economist at OCBC Bank in Singapore.

"Compared with interest rate policy, maybe China may rely more on the currency policy to tackle inflationary pressure now."

(Additional reporting by Zhou Xin, Simon Rabinovitch and Langi Chiang; Editing by Ken Wills and Vidya Ranganathan)

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