China's trade balance plunged $31.5 billion into the red in February as imports swamped exports to leave the largest deficit in at least a decade and fuel doubts about the extent to which frail foreign demand or seasonal distortion drove the drop.
Import growth of 39.6 percent on the year in February was the strongest in a year, well ahead of the 27 percent expected and more than twice the rate of export growth of 18.4 percent that was barely more than half the pace forecast -- albeit at a six month high.
"It's a very mixed picture," said Zhang Zhiwei, chief China economist at Nomura in Hong Kong, who cautioned against reading too much into the data given the underlying volatility caused by the Chinese Lunar New Year holiday that saw a week-long factory shut down in January 2012 and February last year.
By Zhang's calculations that adjust for days worked and exclude the volatility of the 2008/09 financial crisis, exports appear to have posted one of their lowest month-on-month growth rates since the mid 1990s.
"But there is a bright spot in that imports, particularly imported components for export purposes, were weak in January but became a bit better in February. My expectation is that March and April exports will pick up a bit from this level," he told Reuters.
Economists at HSBC had warned clients to brace for a deficit as large as $28 billion. The market consensus had been for a deficit of $4.9 billion.
Analysts polled by Reuters say Lunar New Year distortions mean investors should combine January and February data to better gauge the trend.
Some forewarning of the data earlier in the week came from Commerce Minister Chen Deming, who told a news conference on Wednesday that the value of imports and exports in January and February combined had increased by about 7 percent.
The government is officially targeting full year growth of about 10 percent for both imports and exports in 2012.
The wide range of forecasts for the month underscores the need for caution, with exports called between 5.1 and 65 percent higher in February versus year ago levels, while imports were seen anywhere between down 13.5 percent to up 48 percent.
Exports in January fell 0.5 percent from a year earlier, the worst showing since November 2009, while imports in January tumbled 15.3 percent, raising concerns that domestic demand may be weaker than previously thought -- even allowing for Lunar New Year factory shutdowns.
China's quarterly economic growth is widely forecast by analysts to slow to just over 8 percent in the first quarter from 8.9 percent in the previous quarter, marking the fifth consecutive quarter of slowdown and likely to put the economy on track for its slowest full year of growth in at least a decade.
Still, that slowdown is on course to be a soft landing, with a clutch of indicators on Friday easing investor fears of a sharp deterioration and revealing ample room for Beijing to loosen policy further to support growth.
Expectations of a policy response from Beijing were entrenched by the first major flurry of hard economic data of the year, which revealed an easing in the pace of industrial output, inflation, fixed asset investment and retail sales.
Loan growth data cemented the view that monetary policy would be relaxed further to support demand for credit and ensure policymakers achieve their desired outcome of an economy slowing sufficiently to stop speculative investment, while creating enough jobs to maintain social stability.
RESTOCKING FOR RECOVERY
Soaring commodity imports in February though allay some of those concerns for some analysts.
China imported a record 5.95 million barrels of crude oil per day in February, up 18.5 percent on year ago levels, while copper and iron ore imports were also strong.
Whether allowing for stockpiling in anticipation of rising orders for export, or for increased demand and infrastructure spending domestically, the signs were positive.
Surveys of purchasing managers in China's vast manufacturing sector have turned upwards in recent months, with export orders at the country's biggest firms rebounding sharply to their highest since May 2011.
"Imports were strong in February partly due to restocking among manufacturers in anticipation of rising commodity prices. That led to a big trade deficit in February but we should not worry too much about it," said Hua Zhongwei, economist at Huachuang Securities in Beijing.
"Europe and the U.S. are slowly recovering. We should not be too pessimistic about China's exports. Export growth could be around 10-15 percent (in 2012). We will have a trade surplus for the whole year," Hua said.
Import growth from China's two biggest trading partners -- the European Union and the United States -- give some sense of how Chinese demand is helping underpin recovery.
Imports from the EU grew at their fastest pace in at least two years while import growth from the U.S. was its strongest in 13 months, though China stayed in surplus against both.
The pace of import growth and the scale of the deficit may, however, deflect some criticism China faces from the U.S. which says that Beijing unfairly supports its export industries and keeps its currency artificially weak.