China's Exports Surged by 46% in February, Adding to Currency Pressures

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China exports in February rose for the third month in a row, beating forecasts and putting added pressure on government officials to rein in stimulus spending and loosen currency policies.

Exports in February jumped 45.6% from a year earlier after a 21% advance in January, the customs bureau reported today (Wednesday) on its Web site. 

Seasonally adjusted imports in February rose 6.3% from the previous month, reversing January's 0.9% drop and narrowing the Red Dragon's trade surplus, indicating domestic demand remains strong despite government efforts to slow lending.

Analysts say the February data is hard to interpret since it is distorted by the weeklong Lunar New Year celebration.  Factories close during the holiday, which was celebrated in January last year but in February this year.  Additionally, year-ago export figures were depressed by a contraction in world trade during the international financial crisis.
Nevertheless, economists said the export numbers are worrisome because China's loose lending policies and spending may have overheated the economy. Inflation may have accelerated to 2.5% in February, the fastest pace in 16 months, according to the median estimate in a Bloomberg News survey of economists.

"Overheating in the domestic economy has led to stronger imports of commodities — so we have strong export-demand recovery as well as domestic overheating." Ma Jun, Hong Kong-based chief China economist with Deutsche Bank AG (NYSE: DB) told Bloomberg.  "The rapid rise in exports will add to inflationary pressure and reinforce the arguments for domestic policy tightening." People's Bank of China (BOC) Governor Zhou Xiaochuan said last week that while China must tighten stimulus policies "sooner or later," the government will err on the side of caution when timing an exit because the global economic recovery is still fragile. And other Chinese officials have said they are seeking more evidence of a sustained export recovery before they let the yuan appreciate.

Just this week, a report from Yi Gang, China's director of the State Administration of Foreign Exchange (SAFE), shrugged off calls for currency appreciation despite increasing inflows of "hot money" and deteriorating foreign trade relations.  Premier Wen Jiabao's government has prevented any rise in the currency against the dollar since July 2008 to aid domestic exporters.China's refusal to loosen currency policy has continued to anger U.S. manufacturers who say increasing the yuan's value would strengthen the U.S. export industry and create employment opportunities. The IMF called the yuan "substantially undervalued" in a March 1 note to Group of 20 (G20) finance ministers and central bank governors.
Commerce Minister Chen Deming recently reiterated the government's position, saying it was too early to determine that exports had recovered from the financial crisis.

"The direction of yuan reform will be gradual and controlled," Chen said Monday. "If external demand has not recovered yet, how can we have a fundamental recovery? No country can have a recovery on its own."
Despite external pressure, Wen also said the government will maintain the yuan exchange rate's "basic stability." And some economists point out that as China's domestic consumption keeps growing, exports may slow, reducing calls for the government to float the yuan. 

Alastair Chan, an associate economist with Moody's Corp.'s (NYSE: MCO) Economy.com, said Chinese import growth "will outpace export growth this year because the domestic economy is doing better than those of China's trading partners." 

"If imports increase quite a lot and the trade surplus shrinks, international pressure will fade," he said, noting that China's trade surplus narrowed to $7.61 billion in February from $14.17 billion in January.
Until now, the BOC has limited tightening measures to forcing banks to increase their cash reserves and advising lenders to restrict the expansion of credit. But the central bank may start raising interest rates by the end of this month as its next step, according to Wang Qian, an economist with JPMorgan Chase & Co. (NYSE: JPM) in Hong Kong.

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  1. fred monk | March 11, 2010

    nice piece. i wonder in what year the statement-"no country can have a recovery on it's own? became a truth. thank you Don

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