China's trade surplus soared to a record $26.9 billion in June, exceeding economists' estimates and supplying ammunition for U.S. lawmakers threatening sanctions unless the yuan appreciates faster.

The trade gap, released by the customs bureau today, widened by 87 percent from a year earlier after exporters rushed to beat cuts in export tax rebates. A Bloomberg News survey of 15 economists had a median estimate of $23.8 billion.

More than half of the surplus was with the U.S., where lawmakers last month introduced legislation to punish nations that use their currencies to gain an unfair advantage. Today's figures may heighten tensions already exacerbated by scares over Chinese exports from contaminated seafood to defective tires.

"This level of trade surplus is unprecedented for China or any other major economy in the world,'' said Liang Hong, an economist at Goldman Sachs Group Inc. in Hong Kong. The country needs "to tackle the root cause of China's bloating trade surplus: the significantly undervalued currency.''

The yuan rose against the U.S. dollar before the figures were released and gained the most since the end of a fixed exchange rate in July 2005. The currency climbed 0.27 percent to 7.5810 as of the 5:30 p.m. close in Shanghai.

The yuan has strengthened 9.2 percent since a peg to the dollar was scrapped. That compares with a 12 percent gain by the euro and an 8.9 percent fall by the yen.

Export Record

Exports surged 27 percent to a record $103.27 billion, or more than New Zealand's annual economic output. Imports rose 14 percent to $76.4 billion, the slowest growth in four months.

Overseas sales powered the world's fastest-growing major economy to an 11.1 percent expansion in the first quarter. Gross domestic product for the second quarter is due to be announced next week. The economy may have expanded 11 percent in the first six months, finance minister Jin Renqing said today in Moscow through an interpreter.

The surplus for the first six months was $112.5 billion, up 84 percent from a year earlier. That compares with the record $177.5 billion trade gap for all of 2006. The previous monthly record was October's $23.8 billion.

"This doesn't help at all to reduce tensions with the U.S.,'' said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. "China is going to have to do more to reduce the trade surplus.''

Anti-Dumping Duties

The yuan is undervalued by as much as 40 percent, making China's exports cheaper and costing manufacturing jobs in the U.S., some lawmakers say. China has allowed daily fluctuations of as much as 0.5 percent against the U.S. currency since May, up from the previous 0.3 percent.

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, and Charles Schumer, a New York Democrat, and Republicans Lindsey Graham of South Carolina and Charles Grassley of Iowa are seeking legislation to let American companies petition for steeper anti-dumping duties against countries that keep their currencies undervalued.

China's trade surplus with the U.S. stood at $14.1 billion in June and $73.9 billion for the first six months, according to the customs bureau. The trade gap with Europe was $10.9 billion last month and $57.4 billion in the first half. The U.S. says its deficit with China is bigger than the Chinese figures show.

Weak Import Growth

China's leaders have pledged to boost imports and domestic consumption, while resisting calls for the yuan to strengthen more quickly. Chinese manufacturers are increasingly turning to domestic rather than overseas suppliers, making that goal more difficult to achieve, Mark Williams, an economist at Capital Economics Ltd. in London, said in a note today.

"The most important story is the continued weakness of import growth,'' Williams said. With no prospect of imports growing faster than exports for a sustained period, "the surplus will continue to rise.''

The U.S. Food and Drug Administration slapped a ban on imports of some farm-raised seafood from China on June 28, alleging possible drug contamination.

Regulators last month told consumers not to use toothpaste made in China because it may contain a chemical used in antifreeze. Pet-food additives allegedly contained an industrial chemical and tires were defective.

China today executed the former head of the food and drug regulator in Beijing for taking bribes and outlined a five-year plan to stamp out the production of fake medicine and improve food safety.

Food Safety

Zheng Xiaoyu, former director of the State Food and Drug Administration, was sentenced to death in May, the state-run Xinhua News Agency reported.

The trend in safety "isn't promising'' and the work is on a "weak'' foundation, Yan Jiangying, the Food and Drug Authority's deputy policy director, said at a press conference in Beijing.

China's surplus will probably narrow in the second half of 2007 after cuts in export incentives, according to Vice Commerce Minister Wei Jianguo. China cut tax rebates on 2,831 types of products from July 1. Loaded trucks jammed roads to Shanghai's port for more than a week before the deadline, Hong Kong-based newspaper Wen Wei Po reported.

The National Development and Reform Commission, China's top economic planning agency, forecasts a jump to a $250 billion to $300 billion trade gap this year.

Asset Bubbles

The flood of export cash has complicated efforts to curb investment and asset bubbles. The benchmark CSI 300 Index of stocks has climbed 85 percent this year. Factory and property investment increased 25.9 percent from a year earlier in the first five months.

The central bank has raised interest rates twice this year and ordered lenders to set aside larger reserves five times.

U.S. Treasury Secretary Henry Paulson last month said he will look for ways to be "more creative'' in pressing for increased yuan flexibility. He declined to call the country a currency manipulator.

"China will continue to reform its exchange rate on its own initiative, gradually,'' Vice Premier Wu Yi said on May 25 during trade talks in Washington.

(Published by Bloomberg, July 10, 2007)