China trade swings to largest deficit in seven years

China swung to a surprise trade deficit in February of $7.3 billion, its largest in seven years, as the Lunar New Year holiday dealt an unexpectedly sharp blow to exports. It was China's first trade deficit since March last year and its biggest since February 2004. Economists, who had forecast a small surplus of $4.95 billion, said the sudden drop was likely to prove temporary.
Still, the extent of the slowdown in both exports and imports caught markets by surprise. Asian stocks tumbled on worries that monetary tightening in China and other emerging markets was taking a real chunk out of economic growth. The deficit will at least be welcome news on two fronts for the Chinese government, helping it dampen inflationary pressure and deflect calls for faster yuan appreciation.
Cash inflows from the country's vast trade surplus over the past few years have been a root cause of China's recent run-up in prices. Inflation reached a 28-month high of 5.1 percent in the year to November. Data due on Friday is expected to show it pulled back to 4.7 percent in February.
With tightening policies beginning to have an impact, China is confident that it can achieve its 2011 goal of holding inflation to an average of 4 percent this year, Ma Jiantang, the government's statistics chief, said on Thursday. His comments followed a report in an official newspaper that bank lending in February was much less than expected, indicating that Beijing has scored some success in reining in credit issuance, a crucial part of its campaign to control inflation.
Until that number is confirmed, though, attention will be squarely on China's precipitous drop in exports. China exports grew 2.4 percent in February from a year earlier, the customs agency said on Thursday, well short of forecasts for a rise of 26.2 percent.
Imports increased 19.4 percent, missing market expectations of a 32.3 percent increase. The data hit markets when investors are already worried that high oil prices will undermine global growth. Japan's Nikkei stock average fell 1.5 percent and stocks elsewhere in Asia slid 1.4 percent.
Chinese exports typically slump at the start of the year, with the country's factories shut or running at half speed for weeks because of China's New Year holiday, which this year fell in the first week of February. Yet the holiday effect had been expected to weigh on exports when analysts made their initial forecasts, so some said that the downside disappointment in the data was, in fact, a worry.
On that combined basis, exports rose 21.3 percent from a year earlier and imports increased 36.0 percent, both of which were faster than December's pace. The average trade balance for the first two months of 2011 was a $0.4 billion deficit, far below the monthly average of a $15 billion surplus last year.
With import growth set to outpace export growth, China was hoping to narrow its trade surplus for the third straight year, Commerce Minister Chen Deming said earlier this week. China's trade surplus was $183 billion last year, down from $196 billion in 2009 and a record $295 billion in 2008.
Chen also said that the yuan was on "a gradual upward trend", but that there was no reason for it to move any faster. Although the yuan has been running near record highs against the dollar, it has only appreciated about 4 percent since being depegged last June.