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China saw a mild trade deficit of $884 million in March as a forecast-busting 14.1 per cent year-on-year surge in imports eclipsed export growth of 10 per cent, signalling that domestic demand was gathering steam needed to drive economic recovery.
Customs Administration data on Wednesday showed import growth far in excess of the 5.2 per cent expected, while exports fell just short of the 10.5 per cent rise forecast in the benchmark Reuters poll.
That left China with a trade deficit, compared with a forecast surplus of $15.4 billion and February's surplus of $15.3 billion.
Haibin Zhu, chief China economist at JPMorgan in Hong Kong, said the surge in imports in March could help dispel a major concern over the strength of the domestic demand cycle prompted by weakness of import data in previous months.
"The stronger than expected import growth for March suggest this cycle is probably coming to a turning point," Zhu told Reuters. "If domestic demand turns out to be stronger than expected, it's definitely positive for the economic outlook."
Brent crude futures steadied above $106 per barrel and the Australian dollar hit a 2-1/2-month high after the data as investors cheered numbers that implied recovering domestic demand and strong appetite for commodity imports.
China's Commerce Ministry has pledged to unveil fresh measures this year to boost imports, chiming with Beijing's long-term goal of balancing its trade structure to pursue more sustainable growth by tilting the economy more towards domestic consumption.
A pair of surveys last week showed that stronger domestic demand helped China's factory activity to rebound in March, with new orders up sharply in a sign that the underlying economic recovery is strong enough to weather any risks from patchy external environment.
Analysts say investment-led domestic demand is vital to China's burgeoning recovery from a slowdown in 2012 that saw the economy expand at its slackest pace since 1999 - albeit at a 7.8 per cent rate that is the envy of its major trading partners.
Especially so as exports, which are about 30 per cent of China's GDP, face significant demand headwinds from debt-constrained consumers and governments in the European Union and the US - the country's two biggest foreign markets.
Wednesday's data follows two months of particularly strong export growth - February's soared past forecasts to jump by a fifth year on year, even after January's had jumped by 25 per cent - which had implied a overseas demand boom that had confounded economists.
Uncomfortable reality
"We thought something odd had been going on with (export) numbers," said Alistair Thornton, China economist at IHS Global Insight in Beijing, who believes the export data does not support the notion of the overall economy gaining significant momentum and remains suspicious of it.
"China's exports to Hong Kong grew by an astounding 93 per cent year-on-year - the highest since March 1995 - whilst exports to the EU contracted by 14 per cent year-on-year and those to the US sank by 7 per cent. Given a lot of exports to Hong Kong are actually re-exported to the EU and US as final destinations, this seems a little incongruous, to say the least," he said.
"The upshot is that the 10 per cent headline (export) growth number masks an uncomfortable reality - either the trade data is unreliable, or if it is reliable, then what are being booked as exports are not actually exports. Either way, this is not an optimistic data release," Thornton added.
Analysts believe that Hong Kong is often used by Chinese firms as a conduit through which they can inflate invoices to boost foreign exchange earnings, though there are also legitimate reasons for routing via the special administrative region to mitigate tax bills and third-party customs duties.
There's a huge amount at stake in an economy where total trade was worth some $3.9 trillion in 2012. March exports were worth $182.2 billion, while imports were worth $183.1 billion.
Zheng Yuesheng, spokesman of General Administration of Customs, told a news conference on Wednesday at which the trade data was released that the issue was being investigated.
"We are now looking into the issue closely and have done some initial research. We will work with related government departments to do more detailed research in the future and hope to sort out various reasons behind abnormal trade growth with Hong Kong and will take regulatory measures if needed," he said.
Internal strength
Ting Lu, chief China economist at Bank of America/Merrill Lynch in Hong Kong, echoed concerns about the Hong Kong export surge, but was more focused on the import numbers.
"Import growth in March, mainly on rising domestic demand for raw materials, was strong, implying robust FAI (fixed asset investment) growth in coming months," Lu wrote in a client note.
Infrastructure spending - which grew at an annual rate of 21.3 per cent in the first two months of 2013 - has provided a crucial underpinning to activity in the world's second biggest economy and is widely credited with triggering the recovery which began in Q4 last year.
Iron ore imports jumped 14.4 per cent in March from February, Customs data showed, feeding steel mills that have been producing in excess of 2 million metric tons of steel per day since mid-February in anticipation of a further domestic demand boost.
On the internal front, the accelerating restocking process in some industries and a favourable base effect from a year ago may have flattered March imports, which otherwise remain constrained by falling global commodity prices and a slower-than-expected upturn in investment demand, analysts said.
But Lu pointed to growth of imports for domestic use improving to 4.8 per cent year-on-year in March from a fall of 2.3 per cent in January-February combined, as a clear sign of an uptick in internal demand fuelling economic output.
"With the rise in import growth, which implies a rise in domestic demand as well as some other indicators, we believe GDP growth will rebound in Q2 to above 8.0 per cent (we forecast 8.1 per cent)," Lu said.
China is set to report GDP data for the first quarter of 2013 on Monday, April 15. Economists polled by Reuters have a consensus GDP growth forecast of 8 per cent versus growth of 7.9 per cent in Q4 2012.
POSITIVE SIGNS?
China reported a mild trade deficit in March, signalling that domestic demand, vital to drive an economic recovery, was gathering steam. But analysts have taken the data with a pinch of salt. A look at the numbers
- China saw a trade deficit of $884 million in March
- Import growth in March was 14%, far in excess of the 5.2% expected at $183.1 billion
- Exports in March fell just short of the forecast 10.5% rise at $182.2 billion
- This was in contrast with a forecast surplus of $15.4 billion and February's surplus of $15.3 billion
- China's economy in 2012 grew at its slackest pace since 1999, at 7.8%
