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China's imports leap, cutting trade surplus

By Zhou Xin and Simon Rabinovitch

BEIJING (Reuters) - China's imports leapt in August, boding well for a strengthening of domestic demand in an economy that has become a major driver of global growth.

The unexpectedly big increase in imports also dented China's politically contentious trade surplus ahead of U.S. Congressional hearings next week on whether to punish Beijing for what many in Washington see as an unfairly undervalued yuan.

Wang Hu, an economist with Guotai & Junan Securities in Shanghai, said the import figures along with robust car sales data suggested that China's economy had touched bottom in August.

"As European and U.S. economic growth has slowed since the second quarter, China may again lead the global recovery," Wang said.

Imports jumped 35.2 percent in August compared with a year earlier, easily beating July's 22.7 percent rise and market forecasts of a 26.1 percent increase, General Administration of Customs data showed on Friday.

Annual export growth slowed to 34.4 percent in August from 38.1 percent in July but was close to expectations of a 35.0 percent rise.

That left China with a trade surplus of $20 billion, still eye-popping but down from $28.7 billion in July and well below the median forecast of $27.1 billion.

Growth had slowed over the first half of the year in response to government steps to rein in bank lending, deter property speculation and close obsolete, energy-guzzling plants in sectors such as steel and cement.

Housing prices have been steady since June, the government said on Friday, a sign that its measures to cool the property market have been successful.

Heavy industries have also been running down their inventories, further dampening growth, but the import figures suggest this trend was petering out somewhat, said Qian Wang, an economist with JPMorgan in Hong Kong.

YUAN UNDER SCRUTINY

Financial markets were moderately impressed by the resilience shown by China, which by some estimates has already overtaken Japan as the world's second-largest economy.

Asian stocks outside Japan were up 0.2 percent, while the Australian dollar, which is sensitive to Chinese growth prospects, finished at a four-month closing high. Shanghai stocks ended the day up 0.26 percent.

Dong Xian'an, chief macroeconomist with Industrial Securities in Beijing, said the data implied a strong rebound in domestic demand.

"A possible reason is that China increased imports of raw materials in the last week of August driven by political pressure as well as low global commodity prices," he said.

Analysts polled by Reuters expect the Chinese economy to grow 10 percent this year before slowing to a 9 percent pace next year.

U.S. lawmakers will hold hearings next week on whether to punish Beijing for what critics say is a policy of holding the yuan down to gain unfair trade advantage.

Larry Summers, President Barack Obama's chief economic adviser, visited Beijing this week for talks with President Hu Jintao and other high-ranking Chinese officials.

After the meetings, China and the United States both offered an optimistic take on ties that have been jolted by economic and security tensions as well as disagreements over the yuan's exchange rate.

Coincidentally or not, the Chinese central bank let the yuan climb on Friday to its highest level since it was depegged from the dollar on June 19. Still, the yuan has gained less than 1 percent against the U.S. currency since then.

Moreover, China's rolling 12-month trade surplus widened in August to $177.1 billion from $172.8 billion, handing ammunition to critics who say the country is fixated on exports and is fuelling unhealthy global economic imbalances.

"China's strong export growth and high trade surpluses weaken the argument that China cannot cope with currency appreciation, and should reinforce the case of those policymakers who argue that such a move would help address China's domestic policy challenges while also reducing the potential for trade tensions," Brian Jackson, an economist with Royal Bank of Canada in Hong Kong, said in a note.

(Additional reporting by Langi Chiang; Writing by Alan Wheatley; Editing by Ken Wills & Tomasz Janowski)

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