BEIJING (Reuters) – 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.

China reported its biggest tradedeficit since at least 1989 in February as Europe’s debt crisiscrimped exports and imports rebounded after a weeklong holiday.

It has forecast growth of 2 percent for this year, withconsumption being tempered by exports as the strong dollar hurtscompetitiveness.

“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.

Yesterday, the Bank of Canada kept its key interest rate at 1percent in the longest pause since the 1950s and said there aresome signs of improving domestic spending and diminished risksfrom the global financial crisis.

Imports rose 39.6 percent from a year earlier,after a 15.3 percent slump in January, while exports increased18.4 percent, the bureau said.

Economists at HSBC had warned clients to brace for a deficit as large as $28 billion.

It compared with the median estimate for a $5.35 billion deficitin a Bloomberg News survey of 28 economists.

Analysts polled by Reuters say Lunar New Year distortions mean investors should combine January and February data to better gauge the trend.

Commerce Minister Chen Deming’s warning this week that boosting trade by 10 percentthis year will require “arduous efforts” may also signal aslower pace of yuan gains as policy makers seek to aid exporters.

But in the third quarter, exports grew just 4 percent, and the 1.4 percent growth in the latest quarter represents a marked slowdown.

CAUTION ADVISEDThe 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.

Beset by global economic troubles, rising domestic labor costs, and tightening at home, China’s growth in exports may reach 7 percent this year, with imports up slightly more, year on year, compared with the 20.3 percent and 24.9 percent jumps in 2011.

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.

Exports to the region fell about 2percent to 3 percent in the January February period, Chen said.

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.

The gauge, while up 12 percent in 2012, has declined16 percent from a year ago as China’s growth decelerated to theslowest since the second quarter of 2009.

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 RECOVERYSoaring 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.

This deficit is a tax on domestic demand that erases the benefits of tax cuts and stimulus spending.

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 US 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.

Statistics Canada also reported the merchandise trade surplusnarrowed to C$2.10 billion ($2.11 billion) from a revised C$2.86billion in December as exports fell by the most in 11 months.

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.

Salesto the European Union rose 14 percent in 2011 after a 32 percentgain in 2010, according to data from China’s customsadministration.

Imports from the EU grew at their fastest pace in at least two years while import growth from the US 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 US which says that Beijing unfairly supports its export industries and keeps its currency artificially weak.

Phaedon George is a business journalist based in Hobart, Australia. Phaedon has a passion for financial markets and breaking news stories and loves writing about business news, stock market, and economic opinions that matters most to its audience. Phaedon spends a lot of time discovering and researching latest financial markets and industry news stories in order to make sure the latest and greatest stories are brought to you first on BigBoardNews.com.