June 12 (Bloomberg) -- China posted a record $13 billion trade surplus in May and inflation accelerated, increasing pressure on the government to allow the yuan to strengthen.
The surplus topped the $12 billion median estimate of 21 economists in a Bloomberg News survey and widened from $10.5 billion in April. A separate government report showed consumer prices rose 1.4 percent from a year earlier, the most in four months.
Last month's 25.1 percent jump in exports is undermining government efforts to control inflation by pumping China's economy with cash. A stronger currency would help reduce the imbalance and appease U.S. lawmakers who want to stem a record trade deficit with China and are calling for tariffs on Chinese goods.
``The government wants to keep a lid on money supply and lending growth to prevent it from stoking inflation and asset price bubbles,'' said Tai Hui, an economist with Standard Chartered Bank in Hong Kong. ``There's a considerable inflow of money into the economy and it's a challenge for the central bank to stop it adding to the money supply.''
Royal Bank of Scotland economist Ben Simpfendorfer forecast the trade gap will widen to $150 billion this year -- almost equal to the gross domestic product of Thailand -- from last year's record $102 billion. Exports reached $73.1 billion in May and imports rose to $60.1 billion, the report showed.
China's money supply jumped 19.5 percent in May, Shanghai Securities News said June 9. That would be the fastest gain since December 2003.
Yuan Weakens
A stronger currency would slow exports, which helped drive China's 10.3 percent economic growth in the first quarter. People's Bank of China Governor Zhou Xiaochuan raised benchmark lending rates in April to cool lending for investment and has pledged to gradually withdraw from the nation's currency market.
The yuan has gained 1.2 percent against the dollar since July's 2.1 percent revaluation. The Chinese currency weakened for a second day today on speculation rising interest rates in the U.S. will lure investors away from Asian assets. It fell to 8.0139 against the dollar as of 1.24 p.m. in Shanghai according to data compiled by Bloomberg.
``It would be to the advantage of the Chinese economy to allow the exchange rate regime they gave themselves last summer to work more fully,'' International Monetary Fund Managing Director Rodrigo de Rato said in St. Petersburg June 10.
Inflation
Higher food and fuel prices pushed China's inflation rate higher in May. Food prices rose 1.9 percent from a year earlier and costs of fuel and vehicle spare parts fore 13.2 percent, the most since August.
The government, which controls fuel prices to limit their impact on inflation, is authorizing higher charges to help refiners such as China Petroleum & Chemical Corp. cut losses and to allow prices to more accurately reflect global oil markets. The oil refining industry lost $9.8 billion yuan in the first quarter, the government said in April.
There are signs that companies are beginning to pass on higher energy and raw material costs to consumers. Prices of consumer durables rose in May for the first time in at least 17 months, today's report showed.
``Upward pressure on inflation is greater than downward pressure,'' the People's Bank of China said in its quarterly monetary policy report, published on May 31.
Qingdao Haier Co., the refrigerator and air-conditioner unit of China's biggest appliance maker, last month raised prices of air conditioners by 5 percent, the first increase in more than two years, because of higher copper costs.
U.S. Deficit Threat
China's current account surplus more than doubled to $161 billion last year, accounting for 7 percent of its gross domestic product. Over the same period, the U.S. had a record $805 billion deficit, including a $201 billion trade deficit with China. The U.S. trade gap widened to $63.4 billion in April and the deficit with China grew 13.4 percent to $64.4 billion, the Commerce Department said on June 9.
The U.S. current-account deficit is so big it risks causing a global recession, Bank of Canada Governor David Dodge said in March. A collapse in the ability of the U.S. to finance the shortfall could drive interest rates higher and choke growth in the world's largest economy, economists have said.
Finance ministers and central bankers from the Group of Seven industrial nations on April 21 called for Asian governments, especially China, to allow more currency flexibility to help address the U.S. deficit.
Senator Charles Schumer, a New York Democrat, is sponsoring a bill together with South Carolina Republican Lindsey Graham to impose 27.5 percent duties on Chinese goods unless the yuan is allowed to rise. In March, they agreed to delay a vote on the bill until September following a visit to China.
`Hard to Explain'
Henry Paulson, President George W. Bush's pick to replace John Snow as U.S. treasury secretary, ``may be tougher on China,'' said Jan Lambregts, head of research at Rabobank Groep in Singapore. ``Ultimately I think his job will be to put more pressure on China.''
China's leaders have resisted faster appreciation, saying it could bring about a sharp slowdown in the economy, Asia's second- largest. Officials including Zhou say they prefer policies to boost domestic consumption and demand for imports to reduce the surplus.
Julian Jessop at Capital Economics in London calls China's aversion to yuan gains ``hard to explain'' and JPMorgan Chase & Co.'s Frank Gong says China's policies are ``contradictory'' because a stronger currency would help the government's goal of boosting consumption to make the economy less dependent on exports.
Overcapacity
M2, the broadest measure of money supply, has outpaced central bank targets over the past year as the trade surplus widened. That's created stronger incentives for commercial banks to lend, forcing the central bank to raise the official lending rate in April.
The central bank has said it will step up measures to slow money supply growth, which has led to a surge in bank lending for investment projects. The bank says unbridled investment in factories is creating overcapacity in some industries and driving up raw materials prices, hurting corporate profits.
``The surplus is contributing to excessive liquidity growth and risks an acceleration of investment growth, which raises the risks of more aggressive policy tightening and a sharp slowdown in economic growth,'' said Royal Bank of Scotland's Simpfendorfer.
