Wednesday, March 8, 2017

China Posts First Monthly Trade Deficit In Three Years

By Sue-Lin Wong
March 8, 2017

China unexpectedly posted its first trade deficit in three years in February as imports surged far more than expected to feed a construction boom, driven by commodities from iron ore and copper to crude oil and coal.

The upbeat import reading reinforced the growing view that economic activity in China picked up in the first two months of the year, adding to a global manufacturing revival.

That could give China's policymakers more confidence to press ahead this year with oft-delayed and painful structural reforms such as tackling a rapid build-up in debt.

"We suspect that this largely reflects the boost to import values from the recent jump in commodity price inflation, but it also suggests that domestic demand remains resilient," Julian Evans-Pritchard at Capital Economics said in a note

China's imports surged 38.1 percent from a year earlier, the biggest increase since February 2012, official data showed on Wednesday, while exports unexpectedly fell 1.3 percent.

That left the country with a trade deficit of $9.15 billion for the month, the General Administration of Customs said.

The surprise deficit comes as new President Donald Trump focuses increased attention on China's large and persistent trade surplus with the United States. In an interview with Reuters last month, Trump declared China the "grand champions" of currency manipulation to make its exports cheaper.

Most analysts, however, chalked up the rare deficit to distortions caused by the long Lunar New Year celebrations, which began in late January this year but fell in February in 2016. Many businesses shut for a week or more and factory production and port operations can be significantly affected.

"All deficits since 2005 have been in either the Lunar New Year month or in one of the months around the Lunar New Year month," ING's Chief Asia Economist Tim Condon wrote in a note.

"Like those earlier ones, we expect February's to be a one-off and the full-year trade surplus will be close to 2016's 3.4 trillion yuan."

Still, combined January and February data showed China's trade rose 13.3 percent from the same period a year earlier, suggesting real improvement in underlying demand at home and abroad.

That also jives with strong China factory activity surveys which showed growth in both output and orders is accelerating.

"Looking ahead, we expect external demand to remain fairly strong during the coming quarters which should continue to support exports," Evans-Pritchard said.

But he added that it was unlikely the current pace of import growth can be sustained as the impact of higher commodity prices will start to drop out of the calculations in coming months.

Analysts polled by Reuters had expected February shipments from the world's largest exporter to have risen 12.3 percent in dollar-terms, an improvement from a 7.9 percent rise in January.

Imports had been expected to rise 20 percent, after rising 16.7 percent in January.

That would have produced a trade surplus of $25.75 billion in February, roughly half that recorded in January.

China's February trade surplus with the United States fell to $10.42 billion, the smallest since February 2014. China exports to the U.S. fell 4.2 percent, while its imports from the U.S. rose 38 percent.

Commodity Boom

China's first-quarter economic growth could accelerate to 7 percent year-on-year, from 6.8 percent in the last quarter, economists at OCBC wrote in a note on Monday, while adding that the pace may start softening in spring.

Most of China's February commodity imports grew strongly in volume terms from a year earlier, but dipped from January.

As the government ramps up infrastructure spending and developers rush to complete new housing projects, steel mills are hoovering up more iron ore and coking coal to meet demand.

China's crude oil imports rose to the second-highest level on record in February, as strong demand from independent "teapot" refiners continues to drive growth.

With the economy on much steadier footing than a year ago, the government has trimmed its economic growth target to around 6.5 percent this year, Premier Li Keqiang said in his work report at the opening of parliament on Sunday. The economy grew 6.7 percent last year, the slowest pace in 26 years.

A more modest growth target should in theory give authorities more room to concentrate on reducing the risks from years of debt-fueled stimulus, but they are expected to proceed cautiously and not tap the brakes too hard.

China's central bank has already started bumping up short-term interest rates to encourage debt-laden companies to deleverage and deter speculative activity, but it is expected to keep its benchmark policy lending rate steady through at least mid-2018.

As with last year, China has not set a target for exports in 2017, underlining the uncertain global outlook and fears of rising U.S. trade protectionism, but Li said China will take steps to steady exports this year.

Trump hasn't made good yet on his campaign pledges of greater protectionist measures In the early days of his presidency, but analysts say the specter of deteriorating U.S.-China trade and political ties is likely to weigh on confidence of exporters and investors worldwide.

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