Source: The Wall Street Journal                        Date: 13 April, 2011

China on Sunday registered its first quarterly trade deficit in seven years, reflecting the rising prices of imported commodities and highlighting concerns that China's foundations of growth may be weakening. Most economists predict another banner year for Beijing and forecast further growth—especially with a boost from the U.S. economy's gradual recovery—although slightly less than last year's 10.3%. But the Chinese trade deficit suggests that commodity prices surging at faster than anticipated rates could blunt some of the gains.

The weakening of China's net exports could undercut the arguments of those within China pushing for faster appreciation of the yuan —something the U.S., Europe and other trading partners have been demanding. In March, China managed to eke out a small trade surplus, the government said Sunday, as the trade balance swung to a USD139 million surplus in March from a USD7.3 billion deficit in February.

China's imports in March rose 27.3% from a year earlier, up from February's 19.4% rise. Exports rose by 35.8% from a year earlier, up from February's 2.4% increase, which was suppressed due to the Lunar New Year holiday that month, when many exporters shut down production. For the first quarter, however, China registered a deficit of USD1.02 billion, the first time China reported a quarterly trade deficit since the first three months of 2004.

For the full year, China is still widely expected to post a significant trade surplus. Its foreign trade tends to go through a cycle in which companies stock up on imported raw materials early in the year; those are then processed into exports. But the annual surplus is likely to narrow over the coming year as a slowly strengthening currency, rising labor costs and general inflation are making exports somewhat more expensive, while rising commodity prices are inflating the costs of imports. An economist for UBS estimates China's trade surplus this year will be around USD150 billion, which would be down nearly a fifth from last year's level and mark the third straight year of decline.

The Chinese Government has made scant progress on tapping the country's potentially vast domestic market. The percentage of the economy accounted for by consumer spending has fallen and is about 35% of GDP—about half the level of the U.S.

The ability of China to continue its 30-year record of 10% annual growth faces other challenges, including a roughly 5% annual rate of inflation. That is nearly twice the pace of a year ago, and is widely expected to move higher in the next few months despite the Chinese central bank's recent tightening of interest rates and bank reserve requirements. A bursting of China's property bubble would be especially damaging.