China's foreign trade growth slows sharply

BEIJING - China's foreign trade growth slowed sharply in May, partly due to government rules to curb capital inflows disguised as trade payments, new data showed Saturday.

Total foreign trade volume grew 0.4 percent year on year last month to $345.1 billion, a significant pullback from the 15.7-percent gain seen in April, the General Administration of Customs said on Saturday.

Exports inched up merely 1 percent year on year to $182.77 billion, while imports declined 0.3 percent to 162.34 billion $, leaving China with a surplus of $20.43 billion for the month.

From a month earlier, exports went down 2.3 percent and imports shed 3.0 percent.

"The weaker-than-expected May data reflects China's recent crackdown on hot money inflows," noted Chang Jian, China economist with Barclays Capital.

Rising momentum in China's foreign trade in recent months, against the background of poor strength elsewhere, has raised suspicions that companies may have misreported exports to obtain tax rebates or to bypass the country's capital controls to move money into the mainland, prompting authorities to create new rules to check trade flows.

Earlier last month, the State Administration of Foreign Exchange said it would increase scrutiny of exporters and hand down warnings to those found to be sneaking funds to China through trade.

Wendy Chen, a Shanghai-based economist at Nomura Securities, said the rapid appreciation of the yuan amid quantitive easing in other countries was another factor swamping demand for Chinese exports.

The central parity rate of the yuan strengthened by 117 basis points to reach a new high of 6.1620 against the U.S. dollar on Friday. Since the beginning of April, the yuan has hit a historic high 19 times, a trend that analysts largely believe is not sustainable.

Nomura expects China's foreign trade to maintain soft growth in the following months. But Liu Ligang, chief greater China economist at ANZ Banking Group, said severe challenges lie ahead, as trade frictions are on the rise.

This week, the European Union decided to impose duties on imports of Chinese solar panels. China subsequently opened an anti-dumping and anti-subsidy investigation into wine imported from the EU.

The rising trade frictions, though involving a relatively small portion of trade, will further complicate the already murky trade outlook, Liu said.

Saturday's data followed a string of other surveys that pointed to subdued strength in the economy.

The Purchasing Managers' Index for the manufacturing sector rose to 50.8 percent in May from 50.6 percent in April, while activity in the non-manufacturing sector slackened.

Chang said that whether the weak data will lead to loosened policies needs to be reviewed with other key industrial data, including retail sales and investment, that are due on Sunday.

China's GDP growth slowed to 7.7 percent in the first quarter of 2013 from the 7.9-percent expansion logged in the fourth quarter of last year. But policymakers have so far refrained from introducing drastic measures to stimulate the economy for fear of inflating housing bubbles and disrupting financial stability.

Instead, the government has pinned its hopes on proceeding with structural reforms, including widening market access and reducing government intervention, to lift growth.

"The government should be very concerned. But I think the new leaders have a lower bottom line for GDP growth of around 7 percent, compared with the 7.5-percent rate that we previously expected," Chang said.

China's annual growth target for 2013 has been set at 7.5 percent.