China

China reported stronger export and import figures for February than expected, with the net result of a smaller than expected trade surplus. In fact, February's trade surplus of $7.6 bln is the smallest in a year and a bit more than half of the January surplus. This is consistent, however, with an under-appreciated development that we think is important. In terms of global imbalances, the US trade deficit and the Chinese trade surplus have been roughly halved as a percentage of GDP over the last couple of years. In the US case, it seems largely cyclical and the growth differentials that we expected to close the output gap in the US before Europe and Japan will likely see the US trade deficit grow again, though from a lower base. In China's case, the possibility of a structural shift is greater, though too early to tell. China's exports rose 45.7% in February from the depressed year-ago levels. Yet this is more than twice the pace in January and may also have been distorted by the earlier lunar New Year.

Imports jumped almost 45%, better than the 39.7% expectations, but well off the mind-boggling 85.5% pace reported in January. There are several implications of today's Chinese trade report:

First, with foreign demand improving and domestic demand still appearing robust, it can only add to the near-term inflation pressures. CPI figures are due out as early as tomorrow and the expected 2.5% year-over-year pace would be the fastest pace in 16 months and spur the already growing expectation for a PBOC rate hike. In this regard, note that China reported that commercial and residential real estate in 70 cities rose at an almost 11% clip, which plays on fears of over-heating.

Second, although the US Congress is seeking action to try to pressure China into allowing its currency to appreciate, the decline in China's trade surplus makes it all the more difficult for the Obama Administration to cite China as a currency market manipulator in next month's Treasury report. There has been some speculation that China would be cited as the Obama Administration seeks to preempt Congressional action and seeks to get support for some of the outstanding free trade agreements. Some observers note the weapon sales to Taiwan, the Dalai Lama visit to Washington and the trade frictions all as signs that the Administration is edging toward a more direct confrontation with China. Meanwhile, the 12-month non-deliverable forwards are fairly stable today, ahead of more macro economic data; implying almost a 3% appreciation of the yuan over the next year. We suspect that a rate hike is still several months, with additional administrative moves, like the increase in reserve requirements and tweaking money market rates, continuing to be seen first.