China’s export growth cooled to the weakest in seven months and officials said that trade faces “severe challenges” as the yuan strengthens and confidence slides in developed nations.

Exports climbed a less-than-forecast 17.1 percent in September from a year earlier, customs bureau data showed in Beijing Thursday. The trade surplus fell to $14.51 billion from $17.76 billion in August. Imports rose 20.9 percent, also less than forecast.

The risk of a slump in trade may encourage Chinese officials to refrain from further interest-rate increases and add to support for companies after the State Council Wednesday announced tax breaks for small businesses. The world is relying on China, the biggest contributor to global growth, to sustain an expansion that was 9.6 percent in the first half of the year.

“The leading indicators from the developed economies indicate that worse will follow” for exports, said Yao Wei, a Hong Kong-based economist at Societe Generale AG.

The yuan slipped 0.42 percent to 6.3849 per dollar as of 10:06 a.m. in Shanghai.

Appreciation of the yuan has weakened competitiveness and exporters are afraid to accept large or long-term orders, the customs bureau said in a statement. “Serious development problems, high unemployment rates and sliding consumer confidence” in the EU, U.S. and Japan, and slowing growth in emerging economies “present severe challenges,” it said.

Export growth compared with a median estimate of 20.5 percent in a Bloomberg News survey of 22 economists and a gain of 24.5 percent in August. The median forecast for imports was 24.2 percent after a 30 percent jump in the previous month.

“A major shift in policy is unlikely until early December when the central economic work conference is usually held, although the government is already taking some selective easing measures such as the support extended to small firms,” said Chang Jian, an economist at Barclays Capital in Hong Kong who formerly worked for the Hong Kong Monetary Authority and the World Bank. 

The government will provide financial support and preferential tax policies for small companies, the State Council said in a statement Wednesday, after a meeting where Premier Wen Jiabao presided. The government will be more tolerant of bad loan ratios for small-company loans, the Cabinet said. 

Collapses in Wenzhou

The collapse of some manufacturers in Wenzhou city in Zhejiang province has highlighted concern that small companies are facing a credit squeeze after monetary tightening.

In Guangdong, another export hub, footwear maker Wing Kwai Trading Co. says it faces rising wage costs, weaker demand and a stronger yuan.

“Demand for our products has been falling because of the economic outlook,” said company owner David Huang before Thursday’s trade data. “The yuan keeps rising and workers are asking for higher and higher wages.”

China’s foreign ministry warned U.S. lawmakers Wednesday that a proposed bill allowing penalties against countries that undervalue their currencies would damage bilateral trade and risks undermining the global recovery.The Senate passed the legislation which will now move to the Republican-controlled House of Representatives for a vote.

“Trade tensions, at least the rhetoric, are likely to heat up between China and the U.S. as the global outlook deteriorates,” Chang said. “The yuan’s gradual appreciation is likely to continue as long as world growth doesn’t collapse and exports hold up.”

A stronger yuan would help China curb inflation and reduce the trade surplus, she said. A government report tomorrow may show consumer prices climbed 6.1 percent last month from a year earlier, according to a Bloomberg News survey of analysts. That compares with the government’s full-year target of 4 percent. 

(Bloomberg)