Chinese exports and imports grew faster than expected in February, underlining the momentum behind the world's third-largest economy and reinforcing the case for a rise in the yuan.

Economists cautioned against over-interpreting the figures, which were skewed by the timing of the long Lunar New Year holiday, but said the basic message was one of gathering strength that would justify a firmer exchange rate and further policy tightening measures to nip inflation in the bud.

Exports jumped 45.7 percent in February from a year earlier, following a 21.0 percent rise in January, while imports surged 44.7 percent after record growth of 85.5 percent in January, the General Administration of Customs said on Wednesday.

Jun Ma, chief China economist at Deutsche Bank in Hong Kong, said the data cemented his view that exports in 2010 could surge 30 percent, dwarfing Beijing's forecast of an 8 percent rise.

Obviously, it will translate into stronger pressure for exchange rate reform and it will also add inflationary pressure to the domestic economy, because when exports recover, prices tend to go up. It will reinforce the argument for further policy tightening, Ma said.

China reported a trade surplus for February of $7.6 billion, compared with $14.2 billion in January.

Economists had expected an $8.0 billion surplus based on a 38.7 percent rise in exports and a 39.7 percent rise in imports from year-earlier levels.

We think the very strong headline export growth will help to address concerns on the negative effect of any currency appreciation from some domestic quarters, said Wensheng Peng and Jian Chang at Barclays Capital in Hong Kong.

At the same time, strong domestic demand, as seen in import growth, suggests currency appreciation could play a role in the tightening effort and help to control aggregate demand, although any appreciation is likely to be modest, they said in a report.

HOT PROPERTY

Other data released by the National Bureau of Statistics also painted a picture of a robust economy.

Despite recent steps to cool the property market, investment in real estate surged 31.1 percent in the first two months, compared with a year earlier, and property inflation in 70 major cities across China accelerated to 10.7 percent in the year to February from January's reading of 9.5 percent.

We think that Beijing will need to use all of the policy tools at its disposal to contain price pressures -- both in the property market and more broadly -- and expect to see policy rate hikes in coming months, said Brian Jackson with the Royal Bank of Canada in Hong Kong.

The central bank has already started to cool demand by twice raising the proportion of deposits that banks must keep in reserve rather than lend out. Beijing wants to reduce new lending in 2010 to 7.5 trillion yuan ($1.1 trillion) from a record 9.6 trillion in 2009.

A report in the China Securities Journal that banks made about 700 billion yuan in new loans in February, down from January's 1.39 trillion yuan, helped push bond yields modestly lower.

Traders said the reported halving of loan growth helped allay fears of further monetary tightening that had been spawned by talk of a jump in inflation. Inflation data will be issued on Thursday.

CLOUDED CALENDAR

Most Chinese factories close for the long Lunar New Year holidays, which fell in February this year and in January in 2009. Combining the two months of data to try to smooth out the calendar lumps, exports rose 31.4 percent year-on-year and imports 63.6 percent.

But Lu Zhengwei, chief economist at Industrial Bank in Shanghai, said the low base of comparison with early 2009, when demand was depressed by the global credit crisis, flattered Wednesday's figures.

Adjusting the totals for changes in the number of working days and holidays, exports fell from the previous month for the second month in a row -- by 2.2 percent -- suggesting that the recovery in global demand was not as vigorous as imagined.

I think the sequential figures will cool down expectations of near-term yuan appreciation before trade fully recovers, he said.

Tom Orlik with Stone & McCarthy Research Associates in Beijing said a recovery in exports would be an illusion until demand from China's major trading partners snapped back.

With unemployment in the U.S. and EU remaining stubbornly high, and government subsidies to consumption winding down, that recovery will necessarily be a slow process, he said.

The Australian dollar edged up slightly in the wake of the trade data, as China is the biggest buyer of the country's commodity exports, but overall market reaction was muted.

Still, traders are betting that Beijing will regain enough confidence in China's economy to let the yuan resume its rise after keeping the currency pegged near 6.83 per dollar since July 2008 to help its exporters ride out the global storm.

The offshore non-deliverable forwards market was pricing in a rise of 2.9 percent in the yuan in the next 12 months, compared with implied appreciation of 2.84 percent at Tuesday's close.

We can see the market selling dollars due to the trade data, said an NDFs dealer in a European bank in Singapore.

Central bank governor Zhou Xiaochuan said on Saturday that the decision to repeg the yuan had been a special response to the international crisis and that China would have to shift from that policy stance sooner or later.

The country will possibly let the yuan rise in the second quarter, mainly because of strong domestic growth, but also because of heavy global pressure, said Zhu Jianfang, chief macro economist at CITIC Securities in Beijing. (Additional reporting by Langi Chiang; Writing by Alan Wheatley; Editing by Ken Wills and Tomasz Janowski)

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