China could record a rare trade deficit next year, which would test both Beijing's resolve to go slowly on policy easing and its trading partners' ability to adapt.
The first quarter is shaping up to be especially tough because of slow European and U.S. demand, coupled with the normal spike in imports that comes with the celebration of Chinese New Year, which this year starts in late January.
Zhiwei Zhang, a Nomura economist based in Hong Kong, expects China to import $28.8 billion more than it exports during the first three months of 2012, dwarfing the $1 billion deficit posted over the same period this year. That quarterly deficit was the first since 2004, and China has not recorded a full-year shortfall in two decades.
Chinese Commerce Ministry officials have been warning for weeks that the trade outlook is very severe.
Slowing exports are part of the reason why many economists think China's economic growth will dip below 8 percent, at least in the first half of 2012, if not the full year. The 8 percent mark is considered the minimum growth rate needed to create enough jobs to keep up with a growing urban population.
But it may not be such a terrible thing for the world.
Looking from a global perspective, China's shrinking trade surplus should be seen as a welcome development, as evidence that China has made progress in boosting its domestic demand relative to exports, said Tao Wang, China economist at UBS, based in Hong Kong.
UBS's Wang expects export growth to drop to zero in 2012, which would trim 1.4 percentage points off China's gross domestic product, although she does not think the trade surplus will completely vanish in 2012. Flat exports will prod Beijing to ease fiscal and monetary policy, Wang predicted.
China has shown no willingness to repeat its 2009 spending spree, which helped insulate it from the Lehman fallout, but also left behind a trail of questionable investments and a growing pile of bad debts.
Easy money after the last global recession contributed to a swift rise in home prices that China is now trying to contain in order to avoid a devastating property boom and bust.
That means instead of a deluge of government cash, the spending next year will probably be targeted at areas such as affordable housing and green energy that China has already designated as development priorities.
Reducing banks' reserve requirements is widely expected to be the main policy lever. Interest rate cuts, if any, will be used sparingly.
But if a slowdown turns into something worse, China may abandon the prudent monetary and pro-active fiscal policy approach it spelled out at an annual work conference on December 14.
If the Chinese economy needs stimulation, they have the resources and the political will to do it, Nobel prize-winning economist Josepth Stiglitz told Reuters in an interview in Santiago on Friday.
Unlike the United States, they don't have half the country committed to an ideology which says the way to solve the problem is to cut spending, he said. If their economy slows, they'll spend to keep going.
REST OF THE WORLD
If China's domestic growth stays resilient, the United States would stand to benefit from rising demand. U.S. exports to China reached $84.2 billion in the first 10 months of this year, up by about 16 percent from the same period in 2010, according to U.S. Commerce Department data.
However, for the rest of Asia, slower exports out of China could mean less demand for imports into China. A large fraction of what China imports from its Asian neighbors is raw materials or partially finished goods destined for export channels.
Wiping out the trade surplus, which totalled about $180 billion in 2010, but probably narrowed this year, would also mean fewer U.S. dollars flowing into China. Those reserves are typically recycled into U.S. and other government bonds.
But it could conceivably propel China ahead of the United States in correcting current account imbalances that have been a source of friction between the two countries for years. Washington has long pressured Beijing to reduce its surplus, and promised to tackle its own deficit.
Over the first three quarters of 2011, China's current account imbalance was equal to 3 percent of GDP, below the 4 percent threshold that U.S. Treasury Secretary Timothy Geithner has linked with global economic stability.
The U.S. current account deficit narrowed to 2.9 percent of GDP in the third quarter.
If China's export juggernaut really does run out of steam, perhaps the biggest adjustment the United States will have to make is in its political campaigns.
As is often the case, anti-China rhetoric has intensified as Republicans battle over who will win the right to challenge President Barack Obama in November 2012. Mitt Romney, considered the Republican front-runner, has accused China of manipulating the yuan currency to gain an export advantage and vowed to impose trade sanctions if he were elected.
Despite the rising rhetoric from the U.S. in recent months complaining about China's exchange rate policy, the fundamental pressures for the (yuan) to appreciate have weakened, UBS's Wang said.
(Reporting by Emily Kaiser in Singapore; Additional reporting by Hugh Bronstein in Santiago; Editing by Mathew Veedon)