MOFCOM Calls for Slower Yuan Rise

The recommendations, made in a report to the State Council, or cabinet, followed a 12 percent decline in China's trade surplus in the first half from a year earlier, fuelling worries in Beijing about an economic slowdown.

The cabinet last week asked the Ministry of Commerce (MOFCOM) to report on China's first-half trade performance and make policy suggestions, an official source told Reuters.

In the report, MOFCOM highlighted the challenges faced by Chinese exporters, including a stronger yuan, increasing input costs and the constricting effects of tight monetary policy.

"MOFCOM pleaded that China maintain a stable foreign exchange rate and appropriately slow the pace of yuan appreciation in order to give exporters more time to adjust," the source said.

The yuan climbed 6.6 percent against the dollar in the first half, the fastest clip since the currency was depegged from the dollar three years ago.

The ministry also suggested that tax rebates be raised for labour-intensive exporters, such as textile, garment, toy and shoe manufacturers, the source added.

This would mark a serious turnaround from China's progressive lowering of tax rebates in recent years as it tried to tilt the economy away from low-value manufacturing and to reduce its reliance on exports.

The first sign of such a policy change came last week when official media reported that China would increase rebates for garment and textile makers.

MOFCOM said the average profit margin for companies it surveys fell to only 1.1 percent for the first five months from 3.2 percent in the same period last year, according to the source.

Singling out the textile industry, the agency told the cabinet that about two-thirds of companies in this sector are either in the red or near to it, the source said.

"MOFCOM said all these challenges mean inevitable pain for China as it moves up the value chain," the official said.

"But it warned that if the adjustments are made too swiftly and lead to the closure of too many companies, employment and social stability will be greatly hurt," he added.

The ministry also suggested that the government loosen the reins on commercial banks to let them make more loans to exporters with strong order books and sound profitability.

The central bank set the mid-point of the yuan's exchange rate at 6.8266 against the dollar on Monday, the highest level since the currency was revalued in July 2005.

HOT MONEY

The commerce ministry also provided numbers that underlined how serious China believes its hot money problem has become.

It said less than half of China's trade surplus in the first five months of this year came from real trade in goods and services, implying that much of the inflows were falsified invoices used to disguise speculative capital, according to the source.

About $107.2 billion of $185.2 billion of foreign exchange inflows on the current account in the first five months could not be explained and was potentially illicit capital, he said.

The ministry suggested that China strengthen checks on foreign firms' investment in real estate and their borrowing from abroad.

Earlier this month, China's currency regulator ordered exporters to park their revenues in special accounts so banks can cross-check with customs data that their trade invoices are backed by genuine shipments and are not being inflated.

To better balance China's trade account, which has delivered whopping surpluses over the past five years, MOFCOM suggested that China further lower import tariffs on energy, resources and key equipment and parts, the source said.