A surprisingly sharp moderation in China's export growth last month shook global markets and left many wondering about the economic outlook for the world's biggest exporter.

Compounding matters, a 9.0-magnitude earthquake and giant tsunami in Japan on March 11 has dampened the economy in China's third-largest trading partner, and the lingering threat of a meltdown at a crippled nuclear plant north of Tokyo has also clouded trade prospects.

The chaos in Japan comes as Chinese exporters are already grappling with higher production costs, sapping overseas demand and a stronger yuan.

"It's a year full of uncertainties when China is trying to rebalance its economic structure and rely less on exports," said Xu Weihong, an economist at Guodu Securities Co. "The country may reduce or even cut tax rebates for exporters, while incidents occurring since the beginning of the year are no harbinger of good times."

The disappointing February trade figures don't help the prognosis.

Exports last month rose only 2.4 percent from a year earlier to US$96.7 billion, the slowest pace in 15 months. That led to a trade deficit of US$7.3 billion, the biggest in seven years.

"China's growth pace will be destabilized if exports are battered," Xu added. "Although overseas sales now play a less important role in the overall economy than they did in the past, it's still a very important sector."

Scale unexpected

Wang Qing, an economist at Morgan Stanley, attributed the unexpected slowdown in exports to technical rather than fundamental factors.

"It should be ascribed primarily to the mismatch of the week-long Chinese New Year holiday, which arrived earlier this year," Wang said. "That led to front-loaded activity in January."

Still, he admitted the "scale of the fall was unexpected" and the figures turned out to be much more pronounced than he had predicted.

China's exporters are aware of the challenges. For smaller factories making daily consumption goods with thin margins, it is hard to restructure and upgrade production lines as national policymakers are urging.

"We have tried our best to innovate," said Miao Wentu, general manager of Bossman Gold Pen Co based in Wenzhou, Zhejiang Province. "For capital-tight companies like us, survival is the top priority right now."

At its demonstration booth at the East China Fair in Shanghai earlier this month, Bossman exhibited hundreds of models of pens, each in delicate packaging, along with quality gifts such as key rings, lighters and tie clips.

Bossman used to make only pens. Last year, it responded to the government call for innovation and upgrading by expanding its product line to include items suitable to present as gifts.

But even after the upgrade, Miao said his company is still forced to sell the pens at less than US$1, on fears of losing overseas buyers who have become more cost-conscious.

As the yuan continued to appreciate, Bossman's labor costs and raw material prices have increased. Miao said he feels this year will be harder than last.

The biggest challenge for Miao this month has been how to manage the strong yuan, which in turn makes his pens more expensive in the global market and less competitive compared with rival products from Southeast Asia.

The yuan is currently trading at about 6.57 against the US dollar, an appreciation of nearly 4 percent since China relaxed its exchange-rate regime last June.

The crisis in Japan has Miao even more worried because nearly half of his pens are sold there.

Lu Zhengwei, an economist at Industrial Bank, said China's exports "will receive a distinct blow" in the next three to six months because of the disasters in Japan.

"Quite a number of exporters in China use imported parts from Japan," Lu said. "Since many Japanese plants have suspended their production, China will have to either find other sources or create substitutes."

Affected industries include audio equipment, vehicle and ship parts, and medical instruments, Lu said.

Japan is China's third-largest trading partner, with bilateral trade valued at US$19.7 billion in the first two months of this year, a jump of 22.6 percent from a year earlier. Now the earthquake has cast the momentum in doubt.

Exporters shaken

Nobody can quantify yet how massive the Japan disasters will be for Chinese exports. But it does have some exporters quivering for the moment.

"The Japan disasters will finally pass," said Guodu's Xu. "And eventually reconstruction in Japan may benefit Chinese exporters one day."

Morgan Stanley's Wang said a clearer picture of China's export position emerges if you look at combined January and February data, which showed export growth up 21.3 percent from a year earlier at US$248.36 billion.

Still, compared with export momentum in other major emerging markets, China's figures aren't so impressive.

For example, India's exports in February surged 39.6 percent from a year earlier, buttressed by rising commodity prices for its exports of petroleum, ores, alloys and minerals, by exports of gems, jewelry and garments, and by high value-added shipments of engineering products.

A report by Nomura International (Hong Kong) Ltd said it expects the value of India's merchandise exports to surge about 22 percent in 2011, compared with a forecast of 17 percent growth for China.

Still, no one is underestimating China's ability to adapt to changing times.

Guodu's Xu said he is still confident that China's exports will grow at least 20 percent this year, while Morgan Stanley's Wang forecast a more subdued 15 percent rate.

Chinese Commerce Minister Chen Deming said earlier this month that China's foreign trade will slow this year but still continue to maintain its grow trend.

In 2010, China's exports climbed 31.3 percent to US$1.57 trillion, consolidating its position as the world's biggest exporter - a status it first attained in 2009.