China's trade surplus soars to record in June

By Jason Subler and Zhou Xin

BEIJING (Reuters) - China posted a record trade surplus of $26.9 billion in June as exporters rushed shipments ahead of tax rebate cuts, handing more ammunition to critics who say Beijing's weak currency gives it an unfair trade advantage.

Annual export and import growth slowed in June from May, which Lehman Brothers' economist Mingchun Sun said could point to a softening of economic growth later in the year, and the data coincided with the yuan's biggest one-day rally so far in 2007.

The trade surplus, which easily surpassed economists' expectations of a $24.0 billion gap, was much higher than the previous monthly record of $23.8 billion, set last October.

"This level of trade surplus is unprecedented for China or any other major economy in the world," said Hong Liang with Goldman Sachs in Hong Kong, estimating that the surplus would equal about 8 percent of first-half gross domestic product.

"This again highlights the ineffectiveness of the policy tinkerings that have so far failed to tackle the root cause of China's bloated trade surplus: the significantly undervalued currency," Liang said in a note to clients.

Economists said the surge in the trade surplus was due at least in part to firms seeking to fill orders before July 1, when value-added tax rebates on more than 2,800 export products were either cut or scrapped as part of Beijing's efforts to trim the surplus.

But analysts also noted that the most recent result was in line with a series of large monthly surpluses so far this year. The overall surplus for the first six months came to $112.5 billion, 83 percent more than in the same period last year.

The United States, one of the harshest critics of Beijing's yuan policy, accounted for about two thirds of the figure, with China's surplus with it reaching $73.9 billion in the first half.

In addition to the recent cuts in tax rebates, authorities have imposed new tariffs on products whose exports they want to discourage.

In an effort to curb capital inflows resulting from the booming trade surplus, they have also stopped providing incentives to firms to remit their forex earnings.

The yuan closed at 7.5810 against the dollar on Tuesday, its strongest level since it was revalued by 2.1 percent and decoupled from a dollar peg in July 2005. The currency gained 0.27 percent on the day, its biggest daily rise so far this year.

It has now risen by nearly 7 percent against the dollar since the revaluation.

But there is still mounting pressure, particularly from Washington, for Beijing to do more to let the yuan appreciate further in order to end what many critics say is an unfair trade advantage.

GRADUAL SLOWING

Customs administration data showed annual growth in exports actually slowed in June to 27.1 percent, compared with 28.7 percent in May. However, import growth slowed more sharply, to 14.2 percent, from May's 19.1 percent.