China's yuan, trade surplus climb

BEIJING – The Chinese currency, the yuan, hit a new high against the US dollar on Monday, after China reported its foreign exchange reserve exceeded US$1.53 trillion by the end of 2007 after reaping a huge trade surplus.

The yuan smashed the 7.26 mark to reach a central parity rate of 7.2566 yuan to one US dollar in Monday morning trading, up 106 basis points from Friday, the previous trading day. This was the fifth time that the Chinese currency hit a new high against the US dollar since the beginning of this year.

The yuan rose 6.9% against the dollar last year and has appreciated against the greenback by more than 12% since a new currency regime was imposed in July 2005 to discontinue the local currency's peg to the dollar.

Observers said the yuan's rise would help China reduce its trade surplus, mop up excess liquidity and curb inflation.

China's trade surplus surged soared 47.7% to a record $262.2 billion in the whole year of 2007 despite a slowdown in export growth late last year and the negative impact of the US sub-mortgage crisis overshadowing the world economy, the General Administration of Customs said at the weekend.

The growth rate slowed down noticeably in the fourth quarter of last year. The trade surplus growth was 69.4% for the first three quarters of 2007 and nearly 75% in 2006. The country's trade surplus for 2006 stood at $177.47 billion. Trade surplus last month was $22.69 billion, down 14.2% from November.

Total trade in 2007 hit a new high of $2.17 trillion, up 23.5% from a year earlier, according to the Customs.

The Customs said that in the fourth quarter imports picked up pace while exports slowed. In 2007, China’s exports rose 25.7% to $1.22 trillion, and imports climbed 20.8% to $955.8 billion.

"This indicated that the expanding trade gap was effectively checked as the government's policy adjustments began to pay off," it said in its annual report.

Analysts believed the slowdown in exports was attributed to slackening demand outside China due to factors such as the US economic decline, the combination of a weakening greenback and strengthening yuan, government cuts to export rebates to curb exports.

China has been striving to adjust the trade mix by improving policies concerning export tax rebates, tariffs and processing trade and by restricting exports of high-energy consuming products.

A China Customs Statistics report said the country's foreign trade demonstrated a downward trend in October. While citing the role of government policies and the week off during the National Day holiday, it pointed out the impact of the US sub-mortgage crisis should not be overlooked.

"The overhang of the US sub-mortgage crisis could be a key negative factor in China's trade sector in 2008, if the impact of the mortgage crisis went further to affect US consumption and employment," Zhuang Jian, an Asian Development Bank senior economist, told Xinhua.

He said the country's surplus growth would further slow to about 10% in theory, if export growth continues to fall against a faster pace with import growth.

"However, the final outcome would depend on a wide range of factors, including the mortgage crisis impact and the performance of the US economy in 2008."

United Nations (UN) and World Bank reports released on Wednesday singled out possible export losses for exporting countries due to the US economic decline.

The United States remained China's second-largest trading partner, with the bilateral trade volume standing at $302.08 billion last year, up 15% compared with 2006, according to the customs administration.

Some US critics said the Chinese currency was severely undervalued and gave Chinese exporters an unfair advantage. This had resulted in the massive trade imbalance between the two countries.

"Voices asking for trade protection efforts against China could get stronger this year," said Mei Xinyu, an analyst with a research institute under the Ministry of Commerce. "It is a US presidential election year and we should get prepared for escalating disputes in trade concerning subsidies, intellectual property rights and financial services."

In 2007, the European Union was still China's largest trading partner and Japan its third-largest. Trade with the EU rose 27% year-on-year to $356.15 billion, while Japan reached $236.02 billion, up 13.9%.

A commerce ministry official forecast the country's trade would expand by about 15% this year, down from 23.5% in 2007, to exceed $2.4 trillion.

China's soaring trade surplus is the major factor contributing to the forex reserve boom. The foreign exchange reserve had reached $1.53 trillion by the end of 2007, up 43.3% from 2006, the People's Bank of China (PBoC) announced on Friday.

A total of $461.9 billion was added to the country's forex reserve in 2007, said the central bank. In December alone, the forex reserve rose by $31.3 billion.

China's forex reserve maintained a sharp growth in 2007, reaching $1.2 trillion by the end of March, $1.33 trillion by the end of June, and $1.43 trillion by the end of September.

(Asia Pulse/Xinhua News Agency)