China unexpectedly swings to February trade deficit

By V. Phani Kumar
MarketWatch

HONG KONG (MarketWatch) — China unexpectedly posted a trade deficit in February, according to official data released Thursday, and economists said this could reduce pressure on the country to allow its currency to appreciate.

The rate of growth for both import and export indicators tapered off considerably from the levels seen in January, distorted by the Chinese New Year holidays during the month.

Monthly exports grew a modest 2.4% from the year-earlier period, while imports grew 19.4%, after soaring 37.7% and 51%, respectively, in January.

The slowdown swung the country’s trade balance to a deficit of $7.3 billion in February, more than offsetting January’s $6.5 billion trade surplus and giving China a net trade deficit in the first two months of the year.

The deficit might have implications for the pace at which China allows the yuan to appreciate against the U.S. dollar, say economists.

“One thing we are more certain about [from the data] is that China’s trade surplus is mostly likely to decline at a faster rate than anyone expected this year... A much smaller trade surplus means that the external pressure on yuan appreciation would be less,” said Wei Yao, China economist at Societe Generale in Hong Kong.

February’s deficit was China’s largest in seven years, according to Reuters.

China has often been criticized for artificially keeping the yuan’s exchange rate at low levels to give the country’s exporters a trade advantage. Beijing has also been under pressure from governments of some developed nations to allow a faster appreciation of its currency in view of its massive annual trade surpluses.

The U.S. dollar (USDCNY 6.5731, +0.0151, +0.2303%) , which has slipped 0.3% against its Chinese counterpart, was buying 6.57 yuan on Thursday.

Last year, China’s trade surplus fell to $183 billion from more than $196 billion in 2009.

While a trade deficit would alleviate international pressure on China to let the yuan’s appreciation, it would be in the nation’s own interest to do so, as a stronger yuan would make imports into China cheaper and help Beijing meet its stated objective of boosting domestic consumption, Yao said.

“So what [Thursday’s trade data] means is that now it is even more up to China to decide on the pace of yuan appreciation,” she said.

The data fell way short of projections, with estimates compiled by FactSet Research showing economists expected a 25% growth in February exports to lag behind a 30% rise in monthly imports to give China a $5 billion trade surplus.

Economists, however, pointed out that because of the timing of the Chinese New Year holidays this year, one should look at the data for the first two months of the year, rather than February’s alone, to better understand the message behind the numbers.

B. of A. Merrill Lynch’s China economist Ting Lu wrote to clients that taking January and February figures together, China’s imports grew 36%, while exports accelerated at 21.3%.

“China’s trade balance could be back into surplus again in coming months after the distortion in Jan-Feb, but surging oil prices could add pressures,” Lu said, adding that a one dollar per barrel increase in oil prices could cut China’s annual trade surplus by $1.9 billion.

“On the positive side, the falling trade surplus might alleviate pressures on the [yuan] and also the need for the People’s Bank of China to hike required reserve ratio to lock liquidity,” he added.

Varahabhotla Phani Kumar is a reporter in MarketWatch's Hong Kong bureau.

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