Yuan rise still on cards despite rare trade deficit
BEIJING (Reuters) - China recorded its first monthly trade deficit in six years, but a customs official called the shortfall a blip and economists doubted it would stand in the way of a resumption in the yuan's rise before long.
China's $7.24 billion deficit in March, the first time the trade balance has been in the red since April 2004, mainly reflected strong imports of oil, raw materials and cars, the General Administration of Customs said on Saturday.
Significantly, the level of both exports and imports was higher than in March 2008, before the global credit crunch reached a climax.
China's leaders have said they want to be sure that exports have made a sustained recovery before unwinding anti-crisis policies, including a freeze of the yuan's exchange rate against the dollar imposed in July 2008.
"The trade deficit will likely be cited as evidence that trade flows are adjusting despite the lack of change in China's currency, but we do not think it will be enough to derail the move to a stronger yuan in the months ahead," Brian Jackson, an economist with Royal Bank of Canada, wrote in a note.
International pressure on Beijing to scrap the yuan's peg is strongest from Washington, which says the currency is seriously undervalued, handing Chinese exporters an unfair advantage.
Former U.S. Treasury secretary Henry Paulson said it was in China's interests to have a more flexible exchange rate to dampen inflation and help shift growth toward domestic demand.
"You have to recognize that in the United States it is a symbol for China's commitment to continued reform. My message to my Chinese friends is this is something that needs to be taken seriously and managed so there is continuing progress," he said at the Boao Forum for Asia on the southern island of Hainan.
JUST A BLIP?
Paulson's successor, Timothy Geithner, paid a fleeting visit to Beijing on Thursday on his way home from India, fanning talk that a deal was in the works to unshackle the yuan.
Gao Yi, an economist with Orient Securities in Shanghai, said the March trade deficit may serve as another excuse for Beijing to delay a rise in the yuan, but he said China was likely to let the currency start appreciating either this quarter or next.
"As a large portion of Chinese imports is used for processing trade, strong imports now will translate into strong exports a few months later," Gao said.
Indeed, Zheng Yuesheng, the customs statistics chief, said China was likely to remain a surplus country over the long run. March's deficit was a blip, he told state television.
Nevertheless, the Ministry of Commerce renewed its opposition to a stronger currency. The fact that China had run a deficit, even though the yuan had held steady, showed yet again that the exchange rate was not decisive in determining trade flows, Yao Jian, the ministry's spokesman, said in a statement.
"The continuous improvement in China's international trade balance has created the conditions for the yuan's exchange rate to stay basically stable," he said.
A staunch defender of Chinese exporters, the ministry is at odds with the People's Bank of China, which would like a firmer currency to dampen inflation. Central bank chief Zhou Xiaochuan declined to discuss the yuan on Saturday.
If the deficit is a blip, it should not make a big difference to the decision whether to let the yuan to resume its climb, said Mark Williams, an economist with Capital Economics in London.
"This move could happen any time, but the most likely window is still June, when officials will have been able to review two months data unaffected -- as the March trade figures apparently were -- by the volatility around Chinese New Year," he said.
In a note, Williams said export factories were slow to get back to work last month after February's long holiday break. So, while exports rose 24.3 percent in March from a year earlier to $112.11 billion, imports surged 66.0 percent to $119.35 billion.
On a month-on-month basis, China's exports rose 18.6 percent in March from February, while imports rose 37.3 percent.
The jump in imports partly reflected higher commodity prices. The average cost of imported iron ore was 20.7 percent higher in the first quarter than a year earlier, customs said.
Professor Liu Yuanchun with Renmin University in Beijing said the import surge may ease a touch in April if buyers hold off in anticipation of a higher yuan, which would make imports cheaper.
"But in my view, China might not go back to the pre-crisis yuan policy for another three months," Liu said.
(Additional reporting by David Stanway and Langi Chiang in Boao)
(Editing by Raju Gopalakrishnan)
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