China had its second largest ever trade surplus in September, signaling the government may struggle to cool an investment boom.

The gap narrowed to $15.3 billion from a record $18.8 billion in August, the Beijing-based customs bureau said today on its Web site. For the first nine months, China's trade surplus reached $110 billion, exceeding last year's total.

Premier Wen Jiabao calls the soaring surplus one of China's biggest economic "problems" because it's strained trade ties with the U.S. and flooded the economy with cash, complicating his efforts to slow investment. The gap, which China aims to close by 2010, is adding pressure on the nation to let its currency gain faster to stem money inflows and avoid trade sanctions.

"It's one more argument to allow a stepped up pace of appreciation for the yuan," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.

The yuan fell 0.02 percent to 7.9164 against the dollar as of 9:36 a.m. in Shanghai. Cohen forecast the currency will strengthen to 7.8 to the dollar by year-end.

China, after dropping a peg to the dollar in July 2005, has limited yuan gains against the U.S. currency to a total of 2.4 percent since then. U.S. lawmakers including Senators Charles Schumer and Lindsey Graham have lambasted China for not allowing the yuan to climb faster, and have threatened sanctions.

The European Union last week imposed duties on 9.7 billion euros ($12.3 billion) of Chinese and Vietnamese footwear. China supplied half of the 2.5 billion shoes sold in Europe last year.

Foreign Exchange Reserves

September's surplus topped the $14.35 billion median forecast of 20 economists surveyed by Bloomberg News. China had a $14.1 billion surplus with the U.S. last month, and sold $8.8 billion more of goods to the European Union than it bought from the bloc.

By exporting more than it imports, China has helped underpin an investment boom at home that threatens to leave the nation with idle production lines. The central bank has raised interest rates, forced banks to set aside more money as reserves, and sold bonds to soak up excess funds from the financial system.

"The surplus puts pressure on China to sterilize," said Jun Ma, an economist at Deutsche Bank AG in Hong Kong. "The central bank will likely use a combination of instruments, including the currency" to narrow the surplus.

The gap has caused foreign exchange reserves to skyrocket to almost $1 trillion, the highest of any nation. China's foreign exchange regulator on Oct. 6 said imbalances in international payments balances makes China more vulnerable to external shocks and acknowledged the need to deepen foreign exchange reform and seek other ways to stem the surplus.

Exports Jump

China's exports rose 30.6 percent last month from a year earlier to a record $91.6 billion after jumping 32.8 percent in August, while imports increased 22 percent after gaining 24.6 percent, today's statement said.

"This is a positive sign about global demand and that the world economy is still growing," Cohen said. "It's consistent with the strong trade figures from South Korea and Taiwan."

Federal Reserve Chairman Ben S. Bernanke last week said the U.S. housing market is undergoing a "substantial correction" that will lop a percentage point off growth in the second half of this year. Economists trimmed their forecast for U.S. third- quarter expansion in the past month, a Bloomberg survey showed.

Financial Stability

At the same time, countries are responding to the perceived threat of lopsided trade flows to global financial stability. A swelling U.S. current account deficit, mirrored by a widening surplus in China, may trigger a dollar slump and "play havoc" with the world economy, Asian Development Bank Chief Economist Ifzal Ali said Oct. 3.

The Group of Seven nations, meeting in Singapore last month for the annual meetings of the International Monetary Fund and the World Bank, urged China to increase the flexibility of its currency, while backing away from an outright call for a stronger yuan.

China's current account surplus, which measures flows of goods and services as well as transfer payments, widened to $91.6 billion in the first half from $67.3 billion in the year-ago period. The U.S. had a $431.6 billion shortfall on the current account in the first six months.

Trading Band

The government aims to balance the value of imports and exports by 2010 by curbing growth in overseas sales of textiles, metals and other processed goods, the commerce ministry said yesterday.

Faster currency appreciation will also be necessary to help stem the surplus and stop foreign exchange reserves from piling up, some economists said.

China allows its currency to trade within a daily band of 0.3 percent either side of the dollar. Central bank Governor Zhou Xiaochuan said last month that the band "is still relatively narrow,' and that China will expand it "sooner or later." He also told lenders in China to prepare for such changes. "We're gradually moving toward a more flexible exchange rate," he said.

"I do expect the yuan to continue to appreciate, and you could potentially see some band-widening at the end of the year or early next year," said Jonathan Anderson, chief Asia economist at UBS AG in Hong Kong.