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Monday, April 12, 2010

China Reports March Trade Deficit on Surging Imports

China posted its first trade deficit in six years in March even as the yuan stayed pegged to the dollar, aiding government efforts to play down the currency’s role in global economic imbalances.

The $7.24 billion shortfall, reported by the customs bureau on its Web site today, compared with a median forecast for a $390 million deficit in a Bloomberg News survey of 26 economists. Imports surged 66 percent from a year earlier as exports gained 24 percent.

A trade deficit for a single month may not persuade the U.S. to ease pressure on China to scrap the 21-month-old peg amid calls in Congress for the nation to be branded a currency manipulator. A return to a surplus is likely as soon as this month after seasonal labor shortages hurt exporters of clothes, shoes and bags in March, the customs bureau said yesterday.

The Asian nation may get “some respite from pressure to do more over its exchange rate,” said Mark Williams, a London- based economist at Capital Economics Ltd. “But the calm won’t last. China’s trade surplus will soon reappear.”

Williams expects the yuan to resume its appreciation “in the next few weeks” after being held at about 6.83 per dollar since July 2008. U.S. Treasury Secretary Timothy F. Geithner’s unscheduled visit to Beijing last week fanned speculation that China may be ready to ditch a currency policy adopted to counter the global crisis.

U.S. Trade Gap

While China reported deficits in trade with nations such as Japan and South Korea, today’s figures showed a $9.9 billion surplus with the U.S.

First-quarter import growth was the most since records began in 1980 as the nation’s demand aids the “global economic recovery and rebalancing,” Huang Guohua, the head of the customs bureau’s statistics department, said yesterday. “The most important reason for the March deficit is China’s booming domestic demand.”

Vehicle imports almost quadrupled in March from a year earlier, the customs bureau reported today.

U.S. Commerce Secretary Gary Locke said this week that the financial crisis made it “very clear” that a rebalancing of the global economy is needed. China should boost consumption and move to a market-based currency, he said in an interview with Bloomberg Television.

In contrast, China’s commerce ministry said today that the exchange rate is not the decisive factor in the trade balance. Last year, the gap with the U.S. swelled to $227 billion, according to U.S. data.

Rising Import Costs

Import prices rose 17 percent in March from a year earlier on higher costs for raw materials, customs official Huang said. Net imports of crude oil were the second-highest on record, today’s data showed.

“Imported inflation” adds more pressure for currency gains, said Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd.

The median forecasts of economists surveyed by Bloomberg News were for a 55.7 percent jump in imports and a 27 percent gain in exports. The deficit compared with a $7.6 billion surplus in February and an $18.6 billion surplus in March 2009.

“The deficit is not sustainable,” Huang said yesterday, adding that the failure of some migrant workers to return to work immediately after a Chinese New Year holiday probably capped exports.

The first-quarter surplus fell 77 percent from a year earlier to $14.49 billion. The smaller numbers are likely to continue as exports face headwinds including a fragile global recovery and protectionism and imports stay strong, Huang said.

Betting on Yuan Gains

Non-deliverable yuan forwards, which weakened yesterday ahead of the data, indicate that the currency may gain 3.1 percent against the dollar in the next 12 months. On April 8, the contracts rose by the most this year after the New York Times reported that the Chinese government is “very close” to announcing a change in currency policy, which may include a small, one-time jump in the yuan.

Billionaire investor George Soros said yesterday that China and the U.S. have probably come to an agreement on the yuan.

“What the arrangement is, I’m not privy to, but I think there is an understanding and there will be flexibility on both sides,” Soros said in a Bloomberg Television interview.

Former U.S. Treasury Secretary Henry Paulson said today that a flexible currency would be in China’s interests, and some companies say they’re ready for a change. Hangzhou-based Wanxiang Group Co., the nation’s largest auto-parts maker, can cope with a gradual advance, though a quick appreciation would be “disruptive,” Chairman Lu Guanqiu said in a March 8 interview in Beijing.

China’s trade deficits with Japan and South Korea widened in March from the previous month, while surpluses with the European Union and the U.S. were smaller.

Chinese officials have expressed caution about strengthening the yuan even after growth in the world’s third- largest economy quickened to 10.7 percent in the fourth quarter, stoking concern at inflation and asset-bubble risks.