Chinese worker smiles while preparing packages meant for export at a loading station for traders in Beijing, China, August 10, 2006

China's trade surplus reached an all-time high in July, raising further concerns about inflationary pressure. China's central bank has taken steps to cool the economy by mopping-up excess money, but outstanding loans have continued to rise. 

China Thursday said its trade surplus in July increased by more than 40 percent from last year to a record $14.6 billion.

Chinese exports for July were 22.6 percent higher at over $80 billion, while imports increased by nearly 20 percent to $65.7 billion.

Stephen Green, senior economist at Standard Chartered Bank in Shanghai, says although there are few signs of rapid price increases, the growing surplus could increase inflationary pressures.

"It is almost inevitable that, if you keep having all this amount of money coming into the economy that inflationary pressures will rise," said Green. "And that really is what many economists worry about, that all this big surplus is going to ultimately push China into an inflationary spiral."

The Chinese government has taken steps to reduce money supply. The central bank in April raised interest rates and in July raised the amount of reserves banks must hold. Beijing has also limited foreign investment in real estate, a sector that has been heating up lately.

Despite those efforts, China's central bank says outstanding loans rose by more than $75 billion by the end of June from a year earlier.

China's rocketing surpluses are also causing tension with its trading partners. The United States had a $202-billion deficit with China in 2005, and Washington has repeatedly demanded Beijing raise the value of its currency, the yuan. The European Union has expressed similar concerns over its trade balance with China.

Green says China could reduce the trade surplus and inflationary pressure by allowing the yuan to appreciate, as this would make exports more expensive.

He says currency appreciation would also encourage investment in China's domestic market and service industries.

However, Green says, Beijing is not likely to make any sudden moves.

"The government is very careful about appreciation. It's very scared of it, because it fears it would lose manufacturing jobs, lose processing jobs," he added. "Now, that's probably true in the medium term. But, at the same time, if you allowed more investment in the service sector, you would create services jobs, which would be a good thing."

Green says the government is more likely to eliminate tax breaks on manufacturers and exporters, which would encourage more investment in the domestic market without the negative effects of appreciation.