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China on Wednesday posted a record trade surplus of $23.83 billion for October, handing policy makers a major headache and raising the prospect of even greater pressure on Beijing to let the yuan rise faster.
The surplus soared from $15.3 billion in September and was almost double the October 2005 figure of $12 billion. Economists had expected strong pre-Christmas demand for China's toys, electronics and other goods, but the surplus was a third more than the $17.7 billion they had forecast.
"China's trade surplus went super-sized in October," said Stephen Green with Standard Chartered Bank in Shanghai. After tripling in 2005 to $102 billion, the surplus for the first 10 months of 2006 has already reached $133.7 billion, two-thirds more than in the same period last year.
The yuan ended on Wednesday at its highest level since it was revalued by 2.1 percent in July 2005 and cut loose from a dollar peg to float in tightly managed bands.
But at 7.8661 per dollar, the currency has gained only 3.1 percent in the interim and remains seriously undervalued in the eyes of many economists when judged by China's bulging trade surplus and record $1 trillion stash of foreign reserves.
"I think international calls for China to appreciate the yuan will increase," said Li Mingliang, an analyst with Haitong Securities in Shanghai.
Ma Qing, an analyst with CITIC Securities in Beijing, added: "This will definitely intensify trade frictions with other countries, especially the US and the EU."
The blow-out in the trade surplus reflected both strong exports, up 29.6 percent from October 2005 to $88.13 billion, and surprisingly weak imports, which rose just 14.7 percent to $64.30 billion, according to the customs administration.
Economists said the slowdown in import growth was an unwanted consequence of an array of official measures taken in recent months to rein in wasteful investment growth.
"That could mean that the tightening polices are starting to bite in cooling down investment and reducing demand for imported goods, especially given that Chinese imports seem to be quite capital intensive," said Rob Subbaraman of Lehman Brothers in Hong Kong.
With so much cash pouring into the banking system from the trade surplus, the central bank would probably have to resort to more tightening in coming weeks, economists said.
Subbaraman said the central bank could be forced to increase for the fourth time this year the proportion of deposits that banks must tie up in reserve instead of lending out. It announced their third increase just last Friday.

Copyright Reuters, 2006

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