July was a month of contrasts for Chinese trade. The emerging economic titan posted record export numbers, but saw import growth shrink considerably. That resulted in a massive trade gap that grew 170% from last year, and is now fuelling fears Chinese demand is in the midst of contracting. Here's a breakdown by the Financial Post's John Shmuel, with files from Reuters, of the trade data and what they mean for the global recovery:

UNEXPECTED SURPLUS

China's trade surplus widened to US$28.7-billion in July, hitting an 18-month high, and much higher than the consensus expectation of US$19-billion for which economists had been calling. It's also a giant leap over June's US$19.6-billion surplus. The disparity was fuelled by a higher-than-expected growth in exports, and an unexpected retreat in imports, pointing to lower domestic demand. China's trade surplus with the European Union, its largest trading partner, soared a surprising 56.3% to US$13.6-billion. Meanwhile, the trade surplus with the United States climbed 39.5% to US$19.4-billion.

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EXPORTS SURGE

Overall, export growth shrank to 38.1%from 43.9%, but the growth was enough to push Chinese exports up to a record US$145.5-billion for the month of June. Analysts on average had been expecting growth of about 36.3%. And in a surprising twist, exports to the European Union, which economists expected to shrink due to the sovereign debt crisis, rose 36.4% year over year to US$29.67-billion. Exports to the United States were also higher, jumping 29.4% to US$27.4-billion

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IMPORTS SHRINK

Chinese imports rose 22.7% in July to US$116.8-billion, down significantly from June's growth rate of 34.1% and below consensus estimates of a 30.2% increase. A research note from Lombard Street Research analyst Diana Choyleva says the trade data confirm that real domestic demand was flat in the second quarter, and may have already started to slump in the third quarter. The softening is seeing additional pressure as Beijing's clampdown on bank lending and construction continues in an effort to try to avert an asset-price bubble.

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YUAN ANTICS

A high trade surplus is likely to lead to renewed accusations that China's currency, the yuan, remains artificially low to benefit Chinese trade. Premier Wen Jiabao's government has so far limited the yuan's rise to less than 1% this year since ending a two-year peg to the U.S. dollar in June. "As long as China's surplus remains high, the exchange rate will remain a potential flashpoint," says a note from Capital Economics. "At present, nearly two months after the relaunch of currency policy reform, the exchange rate can best be described as, once again, a dollar peg."

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GLOOMY AUTUMN?

The bottom line is that analysts are now worried that slowing demand in China will hurt the global economic recovery. While Capital Economics contends that export growth shows global demand remains strong, it cautions that stronger growth in imports is going to be difficult as government regulation seeking to prevent an asset bubble. Meanwhile, Ms. Choyleva of Lombard Street Research is a little more pessimistic. "China's cycle has become much shorter and more volatile," she says in her note. "The economy seems to have already turned down, with the growth correction necessary to get rid of the existing overheating likely to be sharp. Prepare for a gloomy autumn and hope for it not to turn into China's winter of discontent."