Chinese trade data reduce slowdown fears – Financial Times

Financial Times, 11/08/2008

China has announced higher-than-expected exports and a surge in factory price inflation for July, reducing the pressure for an easing of monetary and fiscal policy.

The figures, released on Monday, showed China’s trade surplus grew last month by 4 per cent compared with July last year, on top of export growth of 26.9 per cent, reducing fears about a sharp slowdown in the economy at a time of fierce debate within the government over whether to take measures to stimulate higher growth and stop the currency rising.

The government also revealed that factory gate inflation rose to 10 per cent last month, its highest since 1996 and a further indication that China might not be over the worst of its inflation problem despite an expected further drop in consumer price inflation to be announced on Tuesday. The factory gate inflation figures rattled investors, helping to send the Shanghai stock market 5.2 per cent lower.

The new figures underline the delicate situation that Chinese policymakers face in trying to manage a gradual slowdown of the economy while addressing the risks of inflation. Over the past two months, several officials have warned about the impact of higher costs and a stronger currency on the export sector. Growth of the economy as a whole slowed in the second quarter of the year but was still in double digits at 10.1 per cent.

Recent statements by policymakers indicated a subtle shift in the debate, with greater emphasis placed on maintaining growth than on tackling inflation. The pace of appreciation of the currency has also slowed in recent weeks, which some analysts saw as a response to the likely impact of a weaker global economy on Chinese exporters.

However, the July figures showed exports were “not as bad as many had feared”, according to Yu Song, economist at Goldman Sachs. “The strength in exports should help China regain its confidence in allowing the currency to continue to appreciate.”

The government said China’s trade surplus for the month reached $25.3bn (£13.2bn, €16.9bn). “Though we expect a continued deterioration as the year goes on, as American and European consumers stay at home, the resilience of demand for China’s exports is still remarkable,” said Stephen Green, economist at Standard Chartered in Shanghai.

Imports also rose well beyond forecasts, up 33.7 per cent in July, indicating that domestic demand remained strong. However, some economists believe the figures for imports could be inflated by illegal inflows of capital recorded as trade.

The increase in producer price inflation from 8.8 per cent in June to 10 per cent reflected rising energy and commodity prices. The figures contrast with consumer price inflation, which is expected to fall to about 6.6 per cent for July when it is announced on Tuesday, from 7.1 per cent in June.

In a rare official comment to accompany the PPI numbers, a senior government official said the increase would not be passed along in consumer prices because of intense competition in the manufacturing sector.

“It will be hard for factory-gate inflation, which is being driven up by resource costs, to pass through quickly to consumer prices,” said Zhang Liqun, a researcher at the Development Research Centre, a State Council think-tank, in a statement released with the figures.