THE United States' trade deficit with China ballooned to US$1.58 billion in January, up sharply from December's $1.16 billion despite the Lunar New Year festive season. As the deficit continues to escalate in the wake of the Section 301 investigations, designed to prise open China's markets to American goods, analysts reckon the US will be forced to take tougher measures to improve imports into the mainland. The US also chalked up a deficit with Hongkong, after seeing a $105.6 million surplus in December. In January the deficit was $43.3 million. The nation's overall merchandise trade deficit for the month widened to $7.3 billion, from a revised $6.89 billion in December, according to the Commerce Department. The export drop was chiefly due to a sharp drop in sales overseas of civilian aircraft, which is a volatile category in the trade report that jumps and falls month by month. Analysts said aircraft giant Boeing's foreign deliveries during January had slipped to 21 planes from 28 in December. China had the second biggest deficit after Japan - whose tally stood at $3.9 billion - increasing mounting speculation that conditions will be attached to China's most favoured nation (MFN) trade status, or that the mainland will be targeted for other sanctions, such as anti-dumping investigations. Crosby Securities economist Ray Ferris said: ''At the end of the day, what's really behind MFN? It's the trade deficit. Lots of places have human rights problems - look at Indonesia or India - and still have MFN status. ''There are lots of places where you can find violations of human rights, but where you don't necessarily have a massive trade deficit with the US, so America doesn't bother them.'' Bank of East Asia head of economic research Benjamin Chan Sau-san agreed that the trade deficit would play a crucial role in the US decision on MFN. ''It is possible we will see some kind of conditions attached to MFN,'' he said. Human rights activist and businessman John Kamm is also counting on conditions this year under the new US President. Speaking to international and local fund managers on Wednesday night, he said passing legislation targeted at China, and also dragging in Hongkong, would be disastrous. ''I think that would be a mistake of historic proportions and one that will be remembered by the Chinese people themselves in a very negative way,'' he said. The US Government has to reach a decision on China's MFN status by June 3. Other tools likely to be wielded by the US include a refusal to sponsor China's membership to the General Agreement on Tariffs and Trade (GATT) and more unilateral trade attacks. While America is keen to push more exports abroad, overseas countries are counting on the US economic recovery as an opportunity to ship over greater quantities of imports. S.G. Warburg chief regional economist Enzio von Pfeil said: ''If you have a recovery in the US, the US demand for overseas goods rises, and that also pumps up the trade deficit. That's going to intensify the political row on trade in Washington.'' In January, American exports fell $1.7 billion in the capital goods category, which includes civilian aircraft; $900 million in cars, parts and engines; $200 million in foods, feeds and beverages; and $100 million in consumer goods. Exports of industrialsupplies and materials rose $200 million. Analysts have noted that some decline in exports has occurred because of weakness in the economies of some of America's largest trading partners. Imports fell $900 million in the cars, parts and engines category; $600 million in consumer goods; $500 million in capital goods; $100 million in other merchandise; $100 million in foods, feeds and beverages; and $100 million in industrial supplies and materials.