China's Trade Surplus Widens; Potential Collaboration with U.S. in Oil Field Development

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China's Trade Surplus Hits High For the Fourth Straight Month and Chinese Official Calls on U.S. To Jointly Develop Oil Fields

• Summary: China's trade surplus for August grew 33% y-o-y to a new monthly record of $18.8 billion. This was the fourth-straight monthly record set and puts China's ytd surplus about $6 billion short of its entire surplus for 2005. The surplus will likely widen in coming months as it traditionally has ahead of Christmas. Imports increased 25% to $71.97 billion and ytd are up 24% over 2005. Treasury Secretary Henry Paulson is set to make his first official visit to China next week. He is seen urging Beijing to allow a market value for the yuan. A Lehman Brothers analysis of Chinese government trade data however, suggests that the "yuan's value might be becoming less important for Chinese exporters." Fewer of China's top foreign-funded exporters are in price-sensitive industries. A stronger yuan would make China's exports more expensive overseas but lower the cost of its imports. The latter would actually help exporters higher up the value chain such as in electronics since imported components would be cheaper. In separate news, a senior Chinese government official involved in energy policy extended an olive branch to the U.S., recommending the two oil-hungry nations jointly develop oil fields. Zhang Guobao said, the China and U.S. "need to oppose the cold war mentality." Mr. Zhang meets with his U.S. counterpart tomorrow but it's unclear whether he has specific collaboration proposals. There is already some cooperation among U.S. and other foreign firms in helping China develop some of its oil fields. China's oil companies are still largely state-owned and have limited overseas exposure. However, they are sitting on a lot of cash and show eagerness to do deals in places where the U.S. does not, such as in Iran and Sudan. U.S. oil firms are calling for more transparency from the Chinese government's domestic market policies.
• Comment on related stocks/ETFs: Improved consumer spending in the euro zone has resulted in China's exports to Europe now exceeding those of the U.S. to Europe. Although China's imports increased at a double digit pace in August and are up double digits on the year it begs the question of how much is for domestic consumption versus future use in exports. See if you agree whether China is currently in one of the greatest bubble economies in history. China oil companies that trade in the U.S. include: CNOOC Limited (CEO), China Petroleum & Chemical Corp (SNP), and PetroChina Co Ltd (PTR). Read about the risky business of investing in state-owned companies. Also, learn about investing in oil companies.

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