China's Surprise Trade Deficit May Help Nation Parry U.S. Yuan Criticism

China’s efforts to parry U.S. criticism that its currency is undervalued got a boost from a report showing the world’s second-largest economy unexpectedly posted a $7.3 billion trade deficit.

Exports rose 2.4 percent in February from a year before, the least since 2009, as Lunar New Year holidays disrupted shipments, and imports climbed 19.4 percent, customs bureau data showed yesterday. Central bank adviser Li Daokui said that the full-year trade surplus will shrink from the 2010 level.

Yuan forwards dropped as investors pared bets on the appreciation of China’s currency against the dollar. Premier Wen Jiabao aims to spark domestic demand and reduce the role of exports in the economy through wage increases, rather than the exchange-rate gains sought by U.S. Treasury Secretary Timothy F. Geithner and the Obama administration.

“We’re likely to see some narrowing in the trade surplus, perhaps to the $150 billion range in 2011 from $180 billion last year, and China will no doubt attempt to point to this number to deflect the criticism from the U.S. and other trading partners that the yuan is undervalued,” said David Cohen, head of Asian forecasting for Action Economics in Singapore. “I doubt if it will satisfy Tim Geithner’s complaint.”

Cohen and other economists cautioned that China’s trade figures are skewed around the time of the New Year holiday, which occurs at different times because it is tied to the lunar calendar. In March 2010, China posted a $7.24 billion deficit, its first in six years.

‘Significant Surplus’

This year, “the March trade numbers will go back into significant surplus again,” said Donald Straszheim, Senior Managing Director for China Research at ISI Group in Los Angeles.

The U.S. trade deficit widened more than forecast in January to the highest level in seven months as a surge in imports led by costlier crude oil overshadowed record exports, the Commerce Department reported.

The gap in goods and services increased 15 percent to $46.3 billion, from $40.3 billion in December. Imports jumped 5.2 percent, the most since March 1993, while exports grew 2.7 percent. The trade gap with China grew to $23.3 billion from $20.7 billion as imports rose and U.S. exports declined.

“I don’t think the underlying dynamic has changed a lot,” said Scott Paul, executive director of the Alliance for American Manufacturing. “Those who are looking for an excuse to do nothing will look at the Chinese government data. Those who want to do something will look at the U.S. data. ”

India’s Surge

China’s slowdown compared with India’s 50 percent surge in exports last month, reported yesterday. At the same time, India’s $23.6 billion of outbound shipments were less than a quarter of the value of China’s.

Non-deliverable yuan forwards were at 6.4395 per dollar as of 6:58 p.m. yesterday in Hong Kong, after trading at 6.4170 before the data were released. That level indicates the currency may gain about 2.3 percent in the next 12 months.

The Shanghai Composite Index closed 1.5 percent lower.

Yesterday’s report compared with a $6.5 billion surplus in January. The median estimate in a Bloomberg News survey of 21 economists was for a $4.9 billion excess of exports over imports in February.

“I think this is probably the end of the currency wars,” Tim Condon, Singapore-based head of Asia research with ING Groep NV, told Bloomberg Television. He said the deficit was “a move everyone wants to see” and addressed key concerns of the Group of 20 nations relating to economic imbalances.

Brazil Finance Minister Guido Mantega popularized the term “currency war” last year to describe nations securing export advantages by suppressing the values of their currencies.

Boosting Consumption

Speaking in Beijing, Li, the central bank adviser, said the annual surplus may slide to $150 billion this year, from $183 billion in 2010 and the record $295 billion in 2008. Chinese officials this week affirmed policies to boost domestic consumption, including raising minimum wages an average of 13 percent a year in the five-year plan running through 2015.

The swing in February to a trade deficit may aid central bank officials working to prevent an excess of cash in the financial system from worsening inflation that has already breached the government’s 4 percent target for 2011. Pressure for more increases in banks’ reserve requirements may ease, Bank of America-Merrill Lynch said in a note.

Economists combine Chinese data for the first two months of the year to eliminate distortions caused by the annual holiday. On that basis, the nation had a deficit of about $890 million, compared with a surplus of about $22 billion a year earlier.

Commodity Costs

Higher costs for imports of commodities played a role. The average price for the nation’s 120 million tons of iron ore imports over the first two months was $154.3 per ton, 63 percent more than a year earlier, the customs bureau said. Oil and soy- beans costs also jumped.

Bank of America-Merrill Lynch estimates that each $1 increase in oil prices per barrel may cut China’s annual trade surplus by $1.9 billion.

Chinese officials have used press briefings at the annual meeting of the legislature in Beijing as a forum for defending policies relating to the nation’s currency, described as “substantially undervalued” by U.S. officials including Treasury Secretary Timothy Geithner.

Group of 20

The presence of officials from the Group of 20 in Nanjing, China, on March 31 to discuss overhauling the global monetary system may again put a focus on the yuan’s value and expanding international role.

Lenovo Group Ltd., China’s biggest maker of personal computers, sees a stronger currency as likely to boost domestic consumption, Chief Executive Officer Yang Yuanqing said in Beijing on March 8. At the same time, gains should be neither too fast nor too sudden, he said.

The median forecast of economists in a Bloomberg News survey was for a 27 percent increase in February exports from a year earlier and a 33 percent gain in imports. Outbound shipments rose 38 percent in January, while imports surged 51 percent.

--Zheng Lifei. With assistance from Jay Wang in Singapore, Sophie Leung and Marco Lui in Hong Kong, Sonja Cheung, Kevin Hamlin and Bonnie Cao in Beijing, Jin Jing in Shanghai and Rebecca Christie and Sandrine Rastello in Washington. Editors: Christopher Wellisz, Kevin Costelloe

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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