Bad News: Clinton and Obama Back China Crackdown

Eoin Callan of the Financial Times reports:

FT.com / In depth - Clinton and Obama back China crackdown: Hillary Clinton and Barack Obama, the frontrunners for the Democratic presidential nomination, have agreed to co-sponsor legislation that would levy punitive duties on Chinese goods to cajole Beijing into revaluing its currency, according to aides. The endorsement is a sign that trade with China is emerging as a hot political issue in the upcoming ­election and increases the prospect of the legislation passing with a veto-proof majority, analysts said.

The bipartisan legislation has been spurred by claims that China’s cheap currency makes its exports more attractive and is contributing to the record annual $232.6bn (£115.6bn) US trade deficit with the country. The early pledge to vote for the bill will strengthen the candidates’ claims to be defending US manufacturers against what they argue is unfair competition...

Of course, then the candidates will be attacking US consumers (who will pay higher prices for imports), workers in the construction industry, US borrowers (who will then pay higher interest rates to domestic and foreign creditors), and US homeowners (who will see the higher interest rates push down housing prices and reduce their equity). The net short-run effect is surely a minus--it's not as though we desperately need to swap construction jobs for manufacturing jobs right now, and we surely don't need a more-rapid decline in housing prices right now.

In the long run of three to five years, yes: The renminbi needs to become worth a lot more (primarily for China's sake). Pressure on China to adopt better policies is helpful (provided we don't shoot ourselves in the foot). But this strikes me as a classic threat to shoot ourselves in the foot: it is not a good policy move on either Obama's or Rodham Clinton's part.

Eoin Callan goes on:

A critical stance on US trade policy has become increasingly de rigueur for candidates as the Democratic presidential field tilts towards a populist stance on economic issues. The bill... would permit US companies to seek anti-dumping duties on Chinese imports based on the undervaluation of the currency....

Brian Pomper, a former Democratic adviser, said China was becoming a proxy for US political anxiety about globalisation and that sponsorship of the bill was the most combative position yet taken towards Beijing by the two candidates.Sandra Polaski, a trade analyst at the Carnegie Endowment, said US politicians were making China a scapegoat in the face of widespread economic insecurity among voters. “Opinion polls consistently show the American public has a balanced view of China. It is campaigning politicians who are turning the heat on Beijing,” she said...

Comments

[anne]

http://www.nytimes.com/2007/07/07/opinion/07sat2.html

July 7, 2007

Politics and the Yuan

Just in time for the presidential campaign, Barack Obama has joined Hillary Clinton on the misguided bandwagon of those seeking to penalize China for manipulating its currency. Last week, the two senators and Democratic candidates signed up as co-sponsors to a punish-China bill that would mandate retaliation against countries that keep their currencies cheap to boost their exports.

It is a predictable move at a time when voters are so anxious about low wages and holding on to their jobs. (Senator Clinton had already co-sponsored two even harsher anti-China bills in 2003 and 2005. ) China's cheap currency and vast trade surplus, which matches up nicely with America's gargantuan trade deficit, are easy to blame.

Still, the prescription is wrongheaded. There is no guarantee that a rise in the value of the yuan would, on its own, boost American workers' wages or the economy in any significant way. Many of the things China exports to the United States have not been made in America for a long time. Forcing China to revalue the yuan would likely also lead to higher prices for goods in the United States and to a rise in interest rates if China decides to stop buying American Treasury bonds.

And it will complicate the management of a long list of nonfinancial issues the two nations urgently need to address. Washington needs to have what diplomats call a frank discussion with Beijing about its irresponsible export of poisonous toothpaste, dog food and toys and its piracy of American-produced software, movies and other goods. And Washington needs to encourage China to become a more constructive international player on issues from global warming to ending genocide in Darfur....

[tinbox]

This is why many people are giving up on free-trade extremists. While you think something, perhaps even the Clinton/Obama proposal, needs to be done someday, it never seems to be just the right day.
Do you really believe the right time-for Americans, that is-will be when the Chinese government decides it is the right time?

[save_the_rustbelt]

With the Delphi and Dana agreements and pending exits from Chapter 11, most of the auto parts industry will be headed offshore, as the ripple effect begins.

Auto assembly will be next, witness the Chrysler/Chery agreement. Should take about 15 years.

So when do we need to worry about manufacturing jobs? When they are all offshore? What are we doing to blue collar America? Does anyone in academe give a damn?

How can economists crunch so much data and still be so removed from reality?

Most of the new construction jobs appear to be going to illegals, who are much cheaper than American workers and largely outside the scope of our regulatory networks, so if we lose construction jobs we may actually chase some of them home.

[Ponzi Q. Globalization]

It's always good to repeat wisdom...

"This is why many people are giving up on free-trade extremists. While you think something, perhaps even the Clinton/Obama proposal, needs to be done someday, it never seems to be just the right day.
Do you really believe the right time-for Americans, that is-will be when the Chinese government decides it is the right time?"

"So when do we need to worry about manufacturing jobs? When they are all offshore? What are we doing to blue collar America? Does anyone in academe give a damn?

How can economists crunch so much data and still be so removed from reality?"

The neoliberal ediface is crumbling. First, expect economists to bemoan it's weakening claiming that a new dark age is the only alternative and then, when it's clear all is lost and no new grants or corporate think tank sinicures await, to switch sides and start kicking the foundations to hasten its fall.

[Alex Tolley]

It will be interesting to see if China's foreign reserves of USD will be used as a weapon to derail this action. Dumping USD and/or not buying US treasuries should put a nice crimp in our economy. Or maybe they won't in exchange for Taiwan?

[Ponzi Q. Globalization]

Jesus, I can't spell worth a damn! 'ediface' should read 'edifice' in my post above.

[Matt]

Reevaluaton simply causes everyone to use calculators to compute prices. The ports are still there, they are aimed at the U.S.; manufacturing does ot go away, trains still run and executives still run the companies with the same mindset.

We would be better off getting our own economic house in order.

[RN]

I love your work. Unfortunately here, you miss the longer run picture. These tariffs are the only way we can exert some control over the behavior of the US borrower and consumer.

Echoing what someone said in Brad Setser's excellent blog, tariffs are generally a terrible idea, but not these, and not now.

China is not playing fair in the open market. It's obvious by now they have no plan to.

They're scared to death of the effects of the open market, and they should be, because they're quite unprepared. What's happening in Shanghai equities right now is scary even to the most experienced free-market capitalist. China, in the minds of its leaders, lives and dies by control, and things are going great. The only thing that could bring it down is the free market. So anyone who expects a material RMB adjustment should by now have learned, it ain't gonna happen.

So we need to temporarily put tariffs on Chinese goods to force US citizens to save more, consume less. Higher interest rates would be a good thing, not a bad thing as you say. The US needs to learn to live off less credit, not more. The money brought in from the consumption tariffs could be used in some way to help offset the horribly unfair income distribution in the US. Perhaps it could go toward a solution to the health care disaster.

Nearly everything about the tariffs helps the US.

China can't retaliate too badly because we can just devalue their debt, and they know this. They need us on the hook consuming. If we learn to consume more efficiently, they're in big trouble. But we'd on the road to sustainable recovery at that point.

So bring these tariffs on. Time to take at least a little control over the US economy again.

[RN]

Matt says "We would be better off getting our own economic house in order."

Absolutely.

But economics is the social science of incentives. No one's going to change their behaviors unless the incentives (read prices) are forced upon them.

If we've learned anything, it's that our politicians are absolutely hopeless about "getting our house in order".

So expecting as much as a solution completely defies any version of reality.

[James Galbraith]

Brad -

Good for you. One might add: not a single job will return to the U.S. if China revalues. Firms in China will either adjust their prices, or if their profits are too badly squeezed, it's off to Vietnam they go.

So why are Clinton and Obama backing this? Partly because it's a cheap move, playing to the China-phobic while not actually accomplishing anything on the home front. And therefore not threatening any local business interest.

And partly because Wall Street really, really wants the RMB revalued. Why? Most probable hypothesis: There's a lot of Wall Street money in Shanghai, in the property market and in stocks. If the RMB goes up, that's pure capital gain.

You cannot explain Henry Paulson's deep interest in this topic on the basis of its benefits for textile workers. And the Wall Street enthusiasm for Clinton and Obama is very, very clear from their fundraising stats.

JG

[RN]

James Galbraith said: "not a single job will return to the U.S. if China revalues."

Barring purposeful disingenuousness, no one with any economic literacy would make such a statement.

Any first year knows exchange rates influence trade flows, and jobs are created with increased demand.

[Gerard MacDonell]

While we are at it, we should block out the sun, which is really cutting into employment in our energy sector.

[anne]

Brad -

Good for you. One might add: not a single job will return to the U.S. if China revalues. Firms in China will either adjust their prices, or if their profits are too badly squeezed, it's off to Vietnam they go.

JG

[Agreed completely. If American jobs and quality of jobs, wages and benefitis and security, are the issue, then look to the strucutre of our domestic policy. Look to green infrastructure development, lower education infrastructure, dramatic tuition reduction for public college and university students, general health care and strengthened unions.]

[Ponzi Q. Globalization]

"While we are at it, we should block out the sun, which is really cutting into employment in our energy sector."

The sun doesn't strategize and gains nothing by another's loss.

Both you and Bastiat are creatures of the past. Bastiat had a good excuse.

[Adrian]

anne said:

"Washington needs to have what diplomats call a frank discussion with Beijing about its irresponsible export of poisonous toothpaste, dog food and toys and its piracy of American-produced software, movies and other goods. And Washington needs to encourage China to become a more constructive international player on issues from global warming to ending genocide in Darfur...."

Such rose-colored glasses.

Talk, talk. Is it not clear by now that China is not interested in listening? We've had as much luck "talking" to China as we have talking to Iran.

It's astounding to hear these arguments from self-proclaimed "economists". More than anyone, you'd expect economically-minded thinkers to understand that China will act in CHINA's interest. They don't need to do what we say. They may have once, but those days are long gone. Why do we think we have any effect at all on their policy? All the evidence is to the contrary.

And another thing: This "there's no guarantee this will work" argument you hear flying around all the time on the media these days (especially from Republicans who simply want to stonewall), not just with regard to this, but also global warming, health care, immigration, all over the place, is just ridiculous. Since when was there a guarantee anything would work?

"No guarantee" is absolutely no argument against taking steps that make sense.

So let's take some.

[adrian]

anne said: "green infrastructure development, lower education infrastructure, dramatic tuition reduction for public college and university students, general health care and strengthened unions."

Yeah, and how much of that do you see going on?

Living in dreamland isn't a valid policy.

[anne]

There is no economist more sensitive to the needs of American workers than James Galbraith, and we need to attend to the policies he has proposed for years, but these are policies that conjure up a New Deal heritage that many immediately shrink from and that a Republican Congress and President will not entertain.

Paul Krugman has for some while been reading through New Deal times, as have I, and the richness is there for American workers.

[anne]

Well, yesterday the New York Times asked that we leave Iraq immediately. We are now directly spending more than $15 billion a month on Iraq. However we have a President who is not asking even a month worth of added Iraq-like spending on domestic social benefit programs. The President is asking for $11 billion less spending on such domestic programs along with $43 billion more for the military before counting Iraq.

Leave Iraq, and focus on building America.

[anne]

Spending $15 billion a month directly on Iraq, is nightmarish beyond the physical and psychological and moral tragedy of the needless occupation.

We can easily afford a federal-state revenue sharing program to lower public college and university tuitions. We can afford to insure 9 million eligible children lacking in health care coverage, so aiding parents. We can support unions. We can develop a gree infrastructure. Of course, there is the insanity of Iraq which we are affording. Choose.

[adrian]

anne said: "There is no economist more sensitive to the needs of American workers than James Galbraith, and we need to attend to the policies he has proposed for years, but these are policies that conjure up a New Deal heritage that many immediately shrink from and that a Republican Congress and President will not entertain.

Paul Krugman has for some while been reading through New Deal times, as have I, and the richness is there for American workers."

I am almost entirely in agreement with both Galbraith and Krugman (and DeLong).

But the perfect is the enemy of the good, and with Bush now threatening to veto darn near everything that comes from the Democratically-controlled Congress, as you say in your own post, Galbraithian or Krugmanian policy has no chance of being enacted.

So what it boils down to is that out here in the real world, anyone who argues for the impossible is useless to the argument.

I would encourage those who argue for impossible things attempt to come up with something useful and viable.

[anne]

Of course, by the way we have had and will continue to have all sorts of favorable results in relations with China, as we would have favorable results learing to use diplomacy elsewhere. But, China is not an economic enemy while thinking of China as an enemy will only be fruitless or harmful.

[anne]

There is no disagreement, in that with domestic policy so constrained for now diplomacy, continual diplomacy must do. I would offer a lot more now, but more is not possible. I well know the relative weakness of the labor market recovery since November 2001, but the recovery continues and domestic policy changes will come.

[adrian]

anne, I agree with you completely with regard to policy.

However, since you've dragged the thread almost completely off-topic, I'll try to drag it back.

Americans politicians are powerless to do the things you (and I) want. Americans respond to incentives (remember economics?). Americans need to learn to save more, consume less, and in general, learn that there are consequences to their actions, both on a micro and macro level. One way to do this is to put tariffs in mercantilistically cheap goods, which also has the side benefit of moving the US toward a more sustainable economic foundation (if you believe in trade flows and exchange rate influences and demand and job creation).

Heck, even Greg Mankiw wants a gas tax to start to alter energy consumption behavior (although the more regressive a policy, the more in favor of it he is).

This would help your cause too: if we lived more off what we produce and less off sterilized international credit, we'd think a lot harder about sending a trillion dollars (and our youth) into a Mesopotamian vacuum.

[anne]

Paul Krugman reminded me of this passage from Franklin Roosevelt in discussing health care reform today:

http://www.yale.edu/lawweb/avalon/presiden/inaug/froos2.htm

January 20, 1937

The Second Inaugural Address
By Franklin Roosevelt

"Old truths have been relearned; untruths have been unlearned. We have always known that heedless self-interest was bad morals; we know now that it is bad economics. Out of the collapse of a prosperity whose builders boasted their practicality has come the conviction that in the long run economic morality pays. We are beginning to wipe out the line that divides the practical from the ideal; and in so doing we are fashioning an instrument of unimagined power for the establishment of a morally better world...."

[leo]

Like many things, one's view on this depends on which side one's bread is buttered.

[Ken Houghton]

Anne quotes the epigraph at the top of Marginal Utility; I certainly would not argue.

RN - The pity is that James Galbraith is rather more advanced than a "first year," and recognizes that it is not a two-body problem. The jobs are not coming back, though their departure may be slowed slightly. ("Makes a difference to that one")

What Brad DeLong is failing to recognize is the essential truth of what you said above (being right for the wrong reasons): a tariff is the perfect prescription here, not (unfortunately, and as the son of a F worker, I say this in both sorrow and anger) "to force US citizens to save more, consume less." Those who are rather close to c(0) in our incomes know that spending less isn't an option, unless one wants to die. The decline in the NSR is directly related to lack of savings by Those Who Can--and they don't spend most of their income at Wal-Mart.

We need the tariff because, as Dr. DeLong knew 11 days ago but appears to be overlooking now, it will reduce a NONcompetitive advantage of China and other developing countries.

http://delong.typepad.com/sdj/2007/06/does-chinas-ris.html

What we can hope, as American consumers, is that the country(ies) that step into the market due to the tariff follow the Japanese, not the Chinese, model, where exports were required to pass quality standards, and consumers learned quickly that the products were not only affordable, but well-made.

Contrast that to toothpaste buying (http://atbozzo.blogspot.com/2007/07/if-its-friday-there-must-be-fda-recall.html) which has become an adventure due to Chinese export and American import standards.

It's not a two-body problem; "foreman said these jobs are going boys/ and they ain't comin' back" is true no matter whether the product is built in Beijing or Hyperabad or Ulan Bator or Asmara or Alabama.

The question is whether it happens under free-market conditions. the current answer is "no," but a tariff would go a long way toward simulating something closer to that "first year" description.

[Brad Setser]

"Not a single job will return" -- wow, i thought most economists thought exchange rates had an impact on trade. Look at what has happened in IT as Indian software wages increased and the rupee appreciated -- some jobs do seem to be coming back ...

In any case, the issue isn't whether existing Chinese production will relocate to the US. It is whether the next generation of auto parts factories and furniture factories and auto assembly lines and chip fabs will be in the US or in China, whether Chinese consumers will have the external purchasing to buy more US and European goods, whether more electronic component assembly will migrate to china, whether Chinese steel exports will continue to increase and so on. Chinese exports are growing 30% y/y; unless the RMB changes, it is hard to see how that changes. The return of existing jobs isn't the issue; the issue is how adjustment will happen -- and i would think left-leaning economists would prefer than the needed real depreciation of the $ v the RMB not come from a fall in nominal US wages and prices ...

I also don't think the 'street is betting big on a Chinese revaluation. China's capital controls work. the NDF market in the RMB has been a good way to loose money (trust me, i know) -- and the amount of money the street has bet on continued inflows from China assuring a stable, low volatility, low interest rate world far exceeds any bets on the RMB, or any proxy bets on the RMB (the ringgit is the obvious proxy -- look at the scale of flows into MYR in h1). What the street really is betting on right low is the continuation of a low vol highly liquid world, which means they are betting on continued PBoC financing of the US.

Clinton and Obama want to win in Iowa (White goods assembly) in the primary, and want to win in the industrial midwest in the general (Ohio and Michigan). that, not the street, is what i suspect drives their positions

Paulson, at least in my view, has been far more interested in pushing China to allow more US banks and financial firms into China (that is what Wall street really wants -- look at the profits Goldman and BoA have obtained on their investment in chinese state banks) than in pushing RMB revaluation. His whole initial strategy was to back off on the RMB -- he has gotten pushed by congress to get tougher, and it wasn't the congressman who speak for the street who did the pushing.

Bottom line -- I strongly disagree with Dr. Galbraith on this, even tho I generally agree with him far more than I disagree with him.

[Brad Setser]

"Not a single job will return" -- wow, i thought most economists thought exchange rates had an impact on trade. Look at what has happened in IT as Indian software wages increased and the rupee appreciated -- some jobs do seem to be coming back ...

In any case, the issue isn't whether existing Chinese production will relocate to the US. It is whether the next generation of auto parts factories and furniture factories and auto assembly lines and chip fabs will be in the US or in China, whether Chinese consumers will have the external purchasing to buy more US and European goods, whether more electronic component assembly will migrate to china, whether Chinese steel exports will continue to increase and so on. Chinese exports are growing 30% y/y; unless the RMB changes, it is hard to see how that changes. The return of existing jobs isn't the issue; the issue is how adjustment will happen -- and i would think left-leaning economists would prefer than the needed real depreciation of the $ v the RMB not come from a fall in nominal US wages and prices ...

I also don't think the 'street is betting big on a Chinese revaluation. China's capital controls work. the NDF market in the RMB has been a good way to loose money (trust me, i know) -- and the amount of money the street has bet on continued inflows from China assuring a stable, low volatility, low interest rate world far exceeds any bets on the RMB, or any proxy bets on the RMB (the ringgit is the obvious proxy -- look at the scale of flows into MYR in h1). What the street really is betting on right low is the continuation of a low vol highly liquid world, which means they are betting on continued PBoC financing of the US.

Clinton and Obama want to win in Iowa (White goods assembly) in the primary, and want to win in the industrial midwest in the general (Ohio and Michigan). that, not the street, is what i suspect drives their positions

Paulson, at least in my view, has been far more interested in pushing China to allow more US banks and financial firms into China (that is what Wall street really wants -- look at the profits Goldman and BoA have obtained on their investment in chinese state banks) than in pushing RMB revaluation. His whole initial strategy was to back off on the RMB -- he has gotten pushed by congress to get tougher, and it wasn't the congressman who speak for the street who did the pushing.

Bottom line -- I strongly disagree with Dr. Galbraith on this, even tho I generally agree with him far more than I disagree with him.

[andres]

I don't agree fully with James Galbraith either (some jobs will _eventually_ return, imo, if China revalues), but on the whole he has the right idea, and he pinpoints an important focus of cynicism (Sinicism?): every US firm, mainly Wall Street firms, which has RMB-denominated assets will make out like bandits if the dollar price of the RMB increases, at the expense of those Chinese parties, mainly Chinese banks, who hold dollar-denominated assets like T-bonds. A RMB-revaluation is not simply a price adjustment, it is a redistribution of real wealth from China to the US and so it's highly doubtful that China will voluntarily allow it to happen.

As for RN, PQG, and Peter Schaeffer, guys I sympathize, but the US trade imbalance with China is a much more complicated problem that cannot be solved simply by changing the dollar/RMB ratio. RN's first year international economics seems to be limited; the determinant of the trade balance is not just the exchange rate, but overall price competitiveness, eg the ratio of the dollar/RMB exchange rate to the Chinese/US price ratio. And firms try to resist exchange rate hits to their foreign market competitiveness by lowering prices. If this is too much, then as Galbraith points out, nothing prevents Chinese firms from looking for lower labor costs in Vietnam, Philippines, Indonesia, or even further inland in China itself.

Fixing the China/US trade/capital imbalance requires substantial macro- and micro-economic changes in both countries, not crude one-off reforms such as RMB revaluation or US tariffs. For starters, (1) try using the WTO to ensure that labor costs increase not just in coastal China, but everywhere in East Asia and the world, ie use the WTO as a tool of income redistribution by punishing countries that subsidize their export industries by making union organizers disappear and by failing to pay benefits, (2) similarly, expand the power of organizations like the ILO to inspect production facilities and to inform international bodies as to which goods are made using unsafe working or environmental conditions, (3) get China to abandon its own protectionist policies (it has many), (4) improve the quality of many US import-competing goods, most infamously in the automobile industry, and (5) during macroeconomic upswings, reduce the huge amount of US overspending, especially the Federal deficit.

All such changes require not a reduction or elimination globalization, but a reform of globalization so that it plays by different rules. It's not a faith-base matter; think about it.

[save_the_rustbelt]

f current trends continue Sherrod Brown is going to have a lot of company in Congress, and the freer traders are going to have major heartburn.

Even Krugman has, GASP!, come to the conclusion that trade is a factor driving inequality by beating down workers. Shopping at Wal-Mart does not make up for not having a job - brilliant economic insight!

Paulson is a whore for Wall Street, like his boss.

[tinbox]

"Firms in China will either adjust their prices, or if their profits are too badly squeezed, it's off to Vietnam they go."

Really? Chinese manufacturers will fire their workers and relocate to Viet Nam? On what kind of scale could that happen? Over what time period? Even if you include Cambodia and Laos that appears to be an empty threat. China is a very very big country, and its poorer neighbors are rather small countries...

[piotr]

Relocating: I think that coastal China is does not have least wages in Asia, so there is a lot of countries where one could relocate: Vietnam, Bangladesh, Pakistan, perhaps Indonesia. Agregate population 300-500 millions. And then there is Africa. Apparel and shoes industries are already on the move.

China has enormous savings, and a lot of infrastructure by now.

[piotr]

Relocating: I think that coastal China is does not have least wages in Asia, so there is a lot of countries where one could relocate: Vietnam, Bangladesh, Pakistan, perhaps Indonesia. Agregate population 300-500 millions. And then there is Africa. Apparel and shoes industries are already on the move.

China has enormous savings, and a lot of infrastructure by now.

[bsetser]

Chinese commercial banks generally don't have many dollars (they do have some, borrowed from the PBoC via swaps, but that structure leaves the exchange rate risk with the central bank). the financial institution that is exposed to large losses is the central bank -- and it holds t-bills as a matter of policy, so it should be bailed out by the government for the resulting losses. i don't think minimizing the pboc's losses should drive policy, and in any case, keeping the peg means buying more dollars and thus adding to the central bank's dollar exposure.

wall street's rmb holdings are also on the small side. i won't bore you with the details, but the main traded market is a non-deliverable forward market, and that is a market that is offshore and it all nets out -- someone bets on the rmb, someone bets against it. and betting on the rmb means giving up all interest in return for any rmb appreciation. the street would love to be able to bet on the rmb the way it bets on the brazilian real and other currencies, but china has capital controls, so it cannot -- at least not unless it finds someone else outside of china who wants to bet against the rmb (the ndfs again).

[Dean BakerDean Baker]

If the U.S. pushes down the value of the dollar relative to the yuan, it will also fall relative to the Vietnamese currency and the currency of all other competitors with China. This was apparent when China first raised the value of its currency two years ago, and all other developing countries allowed their currencies to rise by comparable amounts.

By the way, I love the idea that relative prices don't affect demand. Economists usually don't say such things except when they want to argue about trade.

One other point, crashing the housing bubble would be the quickest way to increase national savings (reversing the housing wealth effect). Isn't that what all the deficit hawks want?

[save_the_rustbelt]

Please wake me up when the politicians and economists have finished off the American middle class....

"China's trade surplus soars 85.5 percent to record in June
Jul 10 01:15 AM US/Eastern

China's trade surplus expanded by 85.5 percent in June to hit an all-time monthly record of 26.91 billion dollars, official data showed Tuesday, as exporters rushed to beat new curbs.

Exports for June totalled 103.27 billion dollars and imports were 76.36 billion dollars, the customs administration said in a statement on its website.

China posted a trade surplus of 112.53 billion dollars in the first six months of 2007, as exports hit 546.73 billion dollars and imports reached 434.2 billion dollars, it said, without giving comparative data.

But based on previously released figures, the June surplus was 85.5 percent higher than the same month last year and the six-month figure was 83.1 percent larger than the corresponding period in 2006.

The June surplus far exceeded the previous monthly record high of 23.83 billion dollars set in October last year.

A senior analyst at the customs administration had said last week that one of the reasons for the then anticipated June rise was that manufacturers had rushed to ship orders before the end on July 1 of export tax rebates.

Ping An Securities analyst Sun Fanghong agreed that the push to get goods out of the door before the rebate deadline had played a significant role in further widening China's contentious trade gap.

"Exporters are rushing to export," said Sun.

The government announced on June 19 that it would cut or remove export tax rebates for 2,831 commodities, or a third of total exports, from the beginning of this month in another effort to bring some balance to the trade account.

The move came after China imposed extra export tariffs and slashed import duties as of June 1, which led to a similar export boom and lifted May's trade surplus by 73 percent to 22.45 billion dollars, then the third-highest ever.

But Robert Subbaraman, Lehman Brothers analyst in Hong Kong, said the widening surplus was also due to falling imports.

"The composition surprised us -- export growth was not as strong as we had expected. Part of the reason for that record trade surplus is because import growth was weaker than it has been in recent months.

"In the past, it has been very strong in exports. The difference this time is imports which have weakened in terms of the growth rate."

China's huge trade surplus, which soared 74.2 percent to 177.5 billion dollars last year, has been a constant source of friction with its major trading partners, mainly the United States and the European Union.

Beijing has been routinely accused of keeping the Chinese currency artificially low to make its goods cheaper, giving its exporters an unfair competitive edge.

Last month China escaped being branded a currency manipulator in a US Treasury report -- if it had been so accused, then the Asia giant would have become subject to a legal process that can trigger sanctions under US law.

US lawmakers critical of China's trade and foreign exchange policies have unveiled legislation that could make it easier to impose sanctions on Beijing.

Ping An Securities' Sun said the larger surplus would again pressure the currency but was unlikely to affect Beijing's stated policy of maintaining the stable rise of the Chinese yuan.

"The surplus absolutely will impact the yuan's appreciation but I don’t think the Chinese government will change its slow and steady pace (of adjustment) easily," she said."