Trade surplus hits another record

China reported a record trade surplus yesterday but affirmed its policy of keeping the yuan steady.

The central bank also sought to head off pressure for a stronger yuan by saying currency changes alone would not put the balance of payments on an even keel.

China's surplus swelled to US$12 billion last month, up from US$7.1 billion a year earlier and rebounding stronger than expected from a dip in September, the customs office said.

Qu Hongbin, an economist with HSBC in Hong Kong, said the surplus was likely to increase pressure for a further rise in the yuan after July's landmark 2.1 per cent revaluation.

"How Chinese exports perform is largely driven by external demand rather than the exchange rate. But if you have a big trade surplus it will give western politicians an excuse or tool for them to put pressure on the currency," Mr Qu said.

The surplus dwarfed expectations of a US$9 billion figure and took the accumulated total for the first 10 months to US$80.4 billion, compared with US$32 billion for the whole of last year.

The United States accounts for about a quarter of the surplus, which unexpectedly dropped in September to US$7.6 billion from US$10 billion in August.

US President George W. Bush said this week that Beijing's revaluation and accompanying adoption of a managed float for the yuan marked a strong step forward, but he said he would like to see more.

Craving stability, Beijing says it will take its time to achieve currency flexibility so the economy has time to adjust.

"The People's Bank of China will adjust the renminbi's floating band when the time is appropriate, based on its consideration of the markets as well as the economic and financial situation," deputy central bank chief Xiang Junbo said in a speech posted on the bank's website yesterday.

Ruling out another administered adjustment like July's, Mr Xiang said supply and demand would mainly drive the yuan's  value in future.

But he said a higher yuan was no cure-all for China's billowing trade and capital account surpluses. The answer, he said, was for Beijing to pursue policies that spurred domestic consumption.

Gao Shanwen, chief economist with China Everbright Securities in Shanghai, said the surplus next year could reach US$120 billion.

"It will definitely fuel pressure on the renminbi exchange rate," Mr Gao said.

"But my own perception is that the surging trade surplus reflects the economic cycle, because overcapacity is expanding very sharply, rather than the exchange rate itself."

Beijing yesterday also reported that annual producer price inflation slowed in October to 4 per cent from 4.5 per cent in September.

Consumer price figures are due to be released today.