China's First Quarter Trade Surplus Falls and the Yuan Also Rises

China's quarterly trade surplus shrank for the first time in more than three years in the first quarter of 2008, offering additional evidence that cooling exports are starting to slow economic growth. The trade surplus narrowed 10.2 percent to about $41.6 billion in the three months to March 31 when compared with the same period a year earlier. The trade surplus for March alone doubled to about $13.6 billion from a year earlier. Last year's surplus of $6.8 billion was depressed by changes to export taxes and China's Lunar New Year.



China's exports expanded 21.4 percent to $306 billion in the first quarter, slowing from an increase of 27.8 percent a year earlier. Imports climbed 28.6 percent to about $264 billion. China's exports of machinery and electronics products rose 23.1 percent to $181.4 billion in the first quarter from a year earlier, accounting for 59.3 percent of the nation's shipments. Machinery and electronics imports rose 16.4 percent to $125.3 billion, making up 47.4 percent of imports.


Foreign direct investment almost doubled to $27.4 billion from a year earlier, the Ministry of Commerce said today, adding to the cash flooding the economy from exports and fanning price increases. Investment by foreign companies climbed 39.6 percent to $9.3 billion in March from a year earlier. In the first quarter of last year companies invested $15.9 billion in China.

In separate news from the central bank we have learnt that China's wholesale prices jumped 10.2 percent in March from a year earlier. That was the fastest pace since at least November 2000 and doesn't bode at all well for the CPI numbers which are due to be released in the next few days.

Meanwhile the yuan continues to be on the up and up, rising past 7 to the dollar for the first time since China scrapped its fixed-exchange rate in 2005 as policy makers accelerate gains to cool inflation at an 11-year high. The currency strengthened as much as 0.16 percent today to 6.9907, bringing the yuan's advance to 18.4 percent since the end of the peg. The yuan subsequently dropped back, gaining 0.14 percent on the day and holding at 6.9916 at the 5:30 p.m. close in Shanghai, according to the China Foreign Exchange Trade System. The yuan has taken less than six months to break 7 to the dollar after taking 1 1/2 years to climb to 7.5 from 8. Forward contracts show traders are betting on an 11.2 percent advance to 6.2898 in the next 12 months.

The currency's gain against the dollar since the peg ended compares with 5.5 percent for the Taiwan dollar, 9 percent for India's rupee and 34 percent for the Philippine peso. The yen has climbed 11.9 percent and South Korea's won 6 percent.

It is also worth remembering that the yuan has fallen 10 percent against the euro since July 2005 and has declined against a number of other currencies such as the Australian dollar and Brazilian real, an effect which is largely a result of the dollar's slump.

The International Monetary Fund yesterday cut its 2008 economic growth forecast for China to 9.3 percent from 10 percent. China was the biggest driver of world growth last year, contributing 19 percent, according to an IMF estimate.