UPDATE 2-China imports fall in June, trade surplus shrinks

* China imports surprisingly robust due to domestic demand

* Pace of export decline also slows, but not as sharply

* June trade surplus shrinks to $8.25 billion

* Premier Wen frets recovery is not yet on solid ground

By Zhou Xin and Alan Wheatley

BEIJING, July 10 (Reuters) - The rate of decline in Chinese imports slowed sharply last month as the government's massive infrastructure spending sucked in commodities and other goods from the rest of the world.

Imports in June were 13.2 percent lower than a year earlier, compared with forecasts of a 20.4 percent decline and a 25.2 percent fall in May, the General Administration of Customs said on Friday.

As a result, China's trade surplus shrank to $8.25 billion, the lowest total since February and well below market forecasts of $15.2 billion.

"It's further evidence that domestic demand has snapped back," said David Cohen with Action Economics in Singapore. "It's one more indication of renewed momentum in the Chinese economy."

It was the strongest import performance since November and reinforced the view that China is leading other major economies out of a deep downturn brought on by the global financial crisis.

Exports fell by 21.4 percent, close to expectations and an improvement on May's slide of 26.4 percent.

"Imports performed better than exports, and this trend is likely to continue in coming months," said Zhang Zongxin, an economist with Northeast Securities in Shanghai.

"China's domestic investment is very strong right now, helped by massive bank lending, and that means China needs more imports."

Crude oil imports, for instance, were up 14 percent from a year earlier, while imports of copper hit an all-time high in June for the fifth month in a row. [ID:nBJI000181]

HEADING FOR TRADE DEFICITS?

Beijing is implementing a 4 trillion yuan ($585 billion) stimulus package over two years that is centred on spending on infrastructure such as roads and railways as well as public housing and the reconstruction of earthquake-stricken Sichuan.

China's state-owned banks have complemented the pump-priming with a record burst of lending, which surged 7.37 trillion yuan in the first six months, almost 25 percent of annual GDP.

Even so, Premier Wen Jiabao struck a cautious note on Friday, warning that an improvement in the economy did not mean that the China was through its difficulties.

"The economic recovery is not on a solid foundation, and the negative impacts from the international crisis have not eased," Wen said in a summary of recent meetings with economists and industrial groups.

His comments were posted on the government's main website, www.gov.cn.

With domestic demand likely to accelerate further, economists at Goldman Sachs said they expected a significant rise in imports in coming months.

Indeed, economists Yu Song and Helen Qiao said there was a real chance that China might start reporting trade deficits in the first half of next year, something that has not occurred since 2004.

That would defuse criticism, especially loud in the United States, that China is deliberately holding down the exchange rate of the yuan to favour exporters.

Beijing has more or less frozen its currency against the dollar for the past year, and Zhang with Northeast Securities said he expected no change at least for the rest of 2009 and early 2010.

"One thing's for sure -- China won't let the currency appreciate as long as exports remain weak," he said.

For a graphic of China's trade trends, click on

here (Reporting by Aileen Wang, Zhou Xin and Alan Wheatley; Editing by Neil Fullick)