The trade surplus narrowed to $13.1 billion in December, customs authorities said -- a sharp drop from the $22.9 billion recorded in November and below analyst forecasts given by Dow Jones Newswires of $21.7 billion.

But the figure will nevertheless add to the already huge volume of money flowing into the world's second-largest economy, and could fuel soaring inflation.

Exports rose 17.9 percent in December from a year earlier to $154.15 billion while imports rose 25.6 percent to $141.07 billion, customs authorities said. The value of both exports and imports were record highs.

For all of 2010, the trade surplus stood at $183.1 billion compared with $196.1 billion in 2009.

The data caught investors by surprise and the Shanghai Composite Index closed down 1.66 percent, or 46.99 points, to 2,791.81.

Analysts said the figures would not silence calls from China's key trading partners, especially the United States, for Beijing to loosen its grip on the yuan and allow the currency to appreciate more quickly.

"I don't think one month of data will really convince the US congress to take it easy," Citigroup economist Ken Peng told AFP, referring to the drop in the December surplus.

Alistair Thornton, a Beijing-based analyst at IHS Global Insight, agreed, but said the data could give Hu, who will visit the United States from January 18-21, some wiggle room.

"The smaller surplus is not going to remove the 'rebalancing' agenda from Hu's Washington DC trip -- far from it -- but it may provide Hu with a bit of ammunition when the topic comes up," Thornton told AFP.

China maintains tight control over the yuan despite pledging last June to let the currency trade more freely against the dollar.

Critics say the Chinese currency is massively undervalued and gives the country's exporters an unfair trade advantage by making their products artificially cheap.

For five of the past seven months, the politically sensitive trade surplus has been above $20 billion. December's surplus figure was the smallest since April, when it stood at $1.68 billion.

"The narrowing of the trade surplus last month is unlikely to subdue US policymaker criticism of China's pro-exports policies," Moody's senior economist Matt Robinson said in a note.

Peng said a sharp drop in crude oil exports contributed to the smaller surplus last month, as producers slashed shipments to meet soaring domestic demand.

Beijing has stepped up defence of its currency controls ahead of Hu's visit to Washington for talks with US President Barack Obama, saying last week that the yuan exchange rate is not the main cause of the Sino-US trade imbalance.

Foreign ministry spokesman Hong Lei said the "international division of labour" and US export restrictions on high-tech products were contributing factors to China's trade surplus with the United States.

Hong told reporters China would continue to advance reform of its exchange rate mechanism -- remarks echoed by the central bank in a statement.

The still large trade surplus in December will add to the flood of money entering the economy and fuelling inflation as exporters exchange their foreign currency earnings with the central bank for yuan.

Currencies purchased by the People's Bank of China to prevent the yuan from appreciating too quickly add to China's already world-beating foreign exchange stockpile and exacerbate tensions with trade partners.

To alleviate that pressure, the government announced recently that the country's exporters no longer have to change their foreign exchange earnings into yuan.

China's leaders are worried about inflation, which topped five percent in November for the first time in more than two years, given its historical potential to spark social unrest.

earlier related report
Chinese city allows individuals to invest overseas
Beijing (AFP) Jan 10, 2011 - Residents in eastern China have been given the green light to invest directly overseas under a pilot programme that could ease pressure on the yuan and help tame inflation by increasing liquidity outflows.

The amount of money a resident in Wenzhou, a city in Zhejiang province, can invest abroad will be capped at $200 million a year, the Wenzhou Foreign Trade and Economic Cooperation Bureau said on its website.

Residents will be allowed to invest a maximum of $3 million in a single project and, if they are part of a group of investors, the combined total can be no more than $10 million, said the statement issued last week.

Wenzhou gained nationwide fame in the 1980s for its free-wheeling entrepreneurs and factories specialising in everything from cigarette lighters to badges.

The pilot programme marks the latest step by China to loosen its tight grip on the currency, which has been blamed for fuelling the amount of money washing around the world's second-largest economy and fanning inflationary pressures.

The yuan is not convertible under the capital account which includes foreign direct investment and securities investments.

China's central bank tightly controls the yuan exchange rate by purchasing foreign currency entering the country through foreign direct investment, export payments or speculators.

Currencies bought by the People's Bank of China add to the country's already world-beating foreign exchange reserves while the yuan given in return adds to the flood of money entering the economy.

To alleviate that pressure, the government announced recently that the country's exporters no longer have to change their foreign exchange earnings into yuan.

Central bank governor Zhou Xiaochuan wrote in an article earlier this month that China will further relax controls on individuals' cross-border capital account transactions, Dow Jones Newswires reported.

Zhou said the focus would be on increasing the flexibility of residents' use of foreign exchange.

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