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Because of the distortions imposed by the early Lunar New Year celebrations this year, some caution is warranted when responding to last night’s news that the trade deficit for February was the highest since 1990. In the first two months of 2012, exports rose by less than 7% vs. the comparable period of last year, which is consistent with the pattern of softening growth evident in the second half of 2012. At the same time imports were only 10% higher over the same time period, so it could be argued that slowing domestic demand is constraining growth here as well. Other partial indicators such as industrial production and retail sales have also been on the softer side recently, inflation is moderating and property prices continue to decline.

In response to the trade figures, the PBOC lowered the renminbi reference rate significantly overnight. For the year to date, the currency is down 0.5% against the dollar after a 5% appreciation last year. In a speech made last week before the National People’s Congress, Premier Wen Jiabao stated that the exchange rate would be kept ‘basically stable’, providing the strongest hint yet that policy officials will resist currency appreciation over coming months. China’s central bank has declared that monetary policy will remain ‘prudent’, which in effect means that it will ease the financial reins very gradually as it becomes more confident that the inflation genie has been tamed. Further cuts in bank reserve requirements are likely in coming months, with interest rates unlikely to be lowered until the second half of the year.