March 10 (Bloomberg) -- China's trade surplus dropped for the first time in almost a year as the worst blizzards in half a century disrupted shipments and U.S. demand weakened.

The gap narrowed 64 percent in February from a year earlier to $8.56 billion, the customs bureau said today on its Web site. The surplus was less than half the $22.5 billion median estimate of 14 economists surveyed by Bloomberg News.

Exports rose 6.5 percent, the slowest pace in almost six years, aiding government efforts to cool the world's fastest- growing major economy. China's surplus has caused tension with trading partners and threatens to stoke inflation already at an 11-year high by flooding the financial system with cash.

``The decline is due to weaker demand from overseas and the disruption from the snowstorms -- it's too early to say that the surplus will keep slowing sharply,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong.

For the first two months combined, the surplus narrowed 29 percent to $28 billion from a year earlier. Imports increased 35.1 percent in February, the biggest gain in more than three years, on higher prices for commodities such as crude oil, iron ore and soy beans. In January, exports rose 26.6 percent and imports climbed 27.6 percent.

Accelerating Inflation

China's producer prices, the cost of goods as they leave the factory, climbed 6.6 percent last month, the fastest pace in more than three years, the government said today. Baoshan Iron & Steel Co. is raising hot-rolled steel prices in the second quarter on raw-material costs.

Economists expect February consumer-price inflation of 7.9 percent, the highest rate in 11 years, according to a Bloomberg News survey.

That figure will be released tomorrow and China may raise interest rates, already at a nine-year high, within days, Ha Jiming, chief economist at China International Capital Corp. said in Beijing today.

The yuan traded near the highest since a dollar link ended in July 2005 on speculation the government will allow further gains to help combat inflation. It was at 7.1069 per dollar as of 4:15 p.m. in Shanghai, compared with 7.1110 on March 7.

``China's widening trade surplus has been a major source of excess liquidity,'' said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong.

Snowstorms, Holiday

Snowstorms swept across parts of China from mid-January, stalling deliveries to ports and disrupting production at companies such as Tongling Nonferrous Metals Group Co., the nation's largest copper smelter. More than 1.66 million people need new homes after the storms, the government said yesterday.

China's week-long Lunar New Year holiday also started earlier this year than last, leading exporters to bring some shipments forward to January.

The drop in the pace of export growth also reflected the ``abnormally high'' 52 percent increase a year earlier, when exporters pushed shipments through early to beat tax increases, Lehman's Sun said.

Exports of steel products fell 29 percent in February from a year earlier.

Shipments to the U.S., where a housing recession is sapping demand, fell in February to $15.5 billion. That was down from $19.2 billion in January and $16.3 billion a year earlier.

`Remarkable Rise'

``The remarkable rise in China's trade surplus is nearing its end,'' said Ben Simpfendorfer, a strategist at Royal Bank of Scotland Plc in Hong Kong. ``However, the trade surplus will not evaporate abruptly and China will remain a global liquidity provider as it continues to accumulate foreign-exchange reserves.''

Simpfendorfer expects the surplus to ``stabilize'' this year, rising 7 percent to a record $280 billion from a year earlier. That compares with a 48 percent increase in 2007.

Import growth will stay strong as China ships in materials for utility, railway and housing projects and for reconstruction work after the snowstorms. A stronger currency may rein in exports, and China has already made the biggest gains to be had from joining the World Trade Organization in 2001 and from becoming a bigger supplier to manufacturers in Taiwan, South Korea and Japan, Simpfendorfer said.

China's economy, the world's fourth biggest, expanded 11.2 percent in the fourth quarter of 2007 from a year earlier.

``Weaker export and production growth may slow economic growth to below 10 percent in the first quarter,'' said Lehman's Sun.

Lawmakers and manufacturers in the U.S. and Europe say China's export machine is powered by an undervalued currency. The European Union is trying to restrict imports of more than three dozen Chinese products ranging from textiles and chemicals to ironing boards and bicycles through anti-dumping duties.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.netLi Yanping in Beijing at yli16@bloomberg.net

Last Updated: March 10, 2008 05:14 EDT