China Trade Deficit Spurs Concern

China Trade Deficit Spurs Concern (Wall Street Journal,Mar 11, 2012):

BEIJING—China’s trade sector fell deeply into the red last month after running huge trade surpluses for much of a decade, raising questions about whether the country’s economy is tailing off more rapidly than anticipated.

The weekend report of a $31.5 billion trade deficit in China for February was substantially larger than most analysts expected and followed a string of other disappointing economic data, including weak growth in car sales, industrial production and retail sales, and the continuation of a steep fall in property sales. The only bright economic star was that inflation slackened more rapidly than expected.

The weeklong Lunar New Year holiday in January disrupted China’s usual export and import flow for the first two months of the year. But even when combining January and February, the trade deficit came to $4.25 billion, compared with a deficit of $890 million in the first two months of last year.

The overall results prompted analysts to predict that China will ease monetary policy over the coming months to bolster growth—but few expect a package remotely on the scale of the stimulus spending and lending that occurred in 2009 and 2010 in response to the global financial crisis.

Indeed, early last week Premier Wen Jiabao reduced the country’s growth target to 7.5% from the 8% annual target he has used since 2005. While the number is considered symbolic—China’s economy routinely grows far more rapidly than the premier forecasts—growth in gross domestic product may slip below that target in the first quarter of 2012. China hasn’t had a quarter where GDP growth fell below the government’s target since early 2009.

“The risk to growth has replaced inflation as the major macroeconomic risk in China,” said Qu Hongbin, Asia economist for HSBC. Mr. Qu forecasts first-quarter GDP growth of around 8%; J.P. Morgan puts the number at 7.2%. In 2011, China grew 9.2%.

On the trade front, China’s $31.5 billion deficit is the largest monthly deficit since at least 2000, when the Chinese economy was much smaller, and is likely China’s largest monthly deficit ever. China posted a $27.3 billion surplus in January, according to data released by the General Administration of Customs. Weak growth in exports for China, the world’s factory and second-largest economy after the U.S., suggests that global demand remains weak.

Looking at January and February together, exports rose 6.9%, while imports gained 7.7%, far slower than the double-digit gains China usually chalks up. During the two-month period, exports to the European Union, China’s largest trading partner, declined by 1.1% compared with a year earlier. Although China’s exports to the U.S. rose 14.9% during the two-month period compared with a year earlier, that was a slower rate of increase than the 17.4% year-to-year rise in the fourth quarter of 2011.

China doesn’t rely as much on foreign trade for growth as it did during the financial crisis of 2008 and 2009, when the slowdown in exports cost at least 20 million jobs, according to Chinese surveys.

Even so, the weak trade figures are likely to stiffen the resolve of Chinese leaders to reduce the pace of appreciation of the yuan against the dollar from the 4.7% gain of 2011.

Any slowdown is bound to be an issue in the 2012 U.S. elections, especially because China continues to run huge trade surpluses with the U.S., including a $26.2 billion surplus for the first two months of the year, up from $21.5 billion in the year-earlier period.

In 2012, the yuan has been flat against the dollar. “The continuous one-sided appreciation of the yuan has probably come to an end,” Mr. Qu said.

Measures of domestic economic activity were weak as well. Automobile sales in China fell 6% in the first two months of the year compared with a year earlier. The slow start will make it tough for the Chinese auto industry to meet its target of 8%-to-10% growth in auto sales for 2012.

Foreign auto makers have already said China’s once red-hot market for automobiles could register single-digit growth rates for a second year in a row. That would be the slowest back-to-back growth since the market first took off in the late 1990s.

On Friday, the China Association of Automobile Manufacturers said auto sales declined 6% to 2.95 million vehicles in the first two months of 2012 compared with the same period a year earlier.

Car sales over the same period dropped 4.4%, to 2.37 million.

Also on Friday, Chinese government agencies said value-added industrial output in China in the first two months of 2012 was up 11.4% from a year earlier, slowing from December’s 12.8% pace and short of the 12.4% economists had forecast.

Retail sales for the first two months of the year were up 14.7%, slowing from December’s 18.1% pace.

Diminished growth also helped keep inflation in check. Consumer prices in February were up 3.2% from a year earlier, compared with a 4.5% pace in January and economists’ expectations of a 3.4% increase. January’s inflation figure was boosted by high food prices during the Lunar New Year, an effect reversed in February, bringing inflation back down.

To stabilize growth, China’s central bank is likely to cut the reserves that banks are required to hold, which it has already done twice since late last year. That is designed to pick up the current sluggish pace of lending.

But China is wary of cutting interest rates, which can broadly affect the economy. That is partly because policy makers worry that lower interest rates could boost sales of luxury apartments, and reignite a property bubble.

While few economists expect China to unveil a broad stimulus plan, there are other measures available to boost consumer spending, including cutting taxes on luxury goods and reprising programs to subsidize automobile or appliance spending.

The overall fiscal deficit, which the ministry of finance said last week that it is targeting at 1.5% of GDP, could also be raised.

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