China posts first quarterly trade deficit in seven years

China’s first quarterly trade deficit in seven years may ease pressure on the world’s biggest exporter to allow faster appreciation of the yuan.

Asia’s largest economy had a deficit of $1.02 billion in the first three months of the year compared with a surplus of $13.9 billion a year earlier, the customs bureau said on its website today. Imports jumped 32.6 per cent to a quarterly record of $400.7 billion, helped by stronger domestic demand and higher global commodity prices, the bureau said.

China’s trading partners, including the US, say faster yuan appreciation is needed to help address global imbalances that contributed to the financial crisis. Premier Wen Jiabao said last month exchange-rate reform must be gradual to maintain social stability, and that boosting domestic demand is the best way the nation can contribute.

“This is a sign that China’s rebalancing efforts are advancing more rapidly than many had thought and it will take some heat off the pressure for faster yuan gains,” said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. He expects the trade surplus to drop to below $150 billion this year from $183 billion last year.

The trade surplus was $196 billion in 2009, down from a record $295 billion in 2008, customs data show. The gap will decline this year as exporters come under pressure from rising labour and raw material costs and imports are supported by strong domestic demand, Shen said.

Imports Surge
The surge in commodity prices, which contributed to the first-quarter trade deficit, is adding to inflationary pressure. That may prompt the government to allow faster yuan appreciation.

Inbound crude oil shipments in the first quarter rose 12 per cent by volume and 39 per cent by value to $43.7 billion, according to today’s customs data. The cost of iron ore imports jumped 82.5 per cent to $27.7 billion while the amount of metal climbed 14.4 per cent.

“China is still facing strong pressure from imported inflation,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group in Hong Kong who formerly worked for the World Bank. “While the authorities can use fiscal subsidies to offset this, the exchange rate tool is more effective to contain imported inflation.”

Liu forecasts the yuan will rise 6 per cent against the dollar this year. China has held the gains to 4 per cent in the past year, with US Treasury Secretary Timothy F Geithner continuing to describe the currency as “substantially undervalued.” The yuan reached a 17-year high of 6.5350 per dollar on April 8.

Record Reserves
China’s previous quarterly trade deficit was more than $8 billion in the first three months of 2004.

The unexpected $140 million surplus last month compared with the median forecast for a deficit of $3.35 billion in a Bloomberg News survey of 24 economists.

Imports in March jumped by more than economists estimated, rising 27.3 per cent from a year earlier to a record $152 billion, the customs bureau said. Exports also climbed by more than expected, surging 35.8 per cent to $152.2 billion and close to December’s record of $154 billion, customs data show.