Wall Street Journal 12 Marzo 2009

BEIJING: A sharp decline in China's trade surplus in February likely signals a shift in the nation's financial balance with the rest of the world, and may reduce the speed with which it piles up foreign-currency assets such as U.S. Treasury bonds.

China's merchandise exports in February plunged 25.7% from a year earlier, the nation's customs agency said. That's one of the biggest drops on record, and extends the 17.5% fall in January for a fourth straight monthly decline.

Imports declined a slightly less dramatic 24.1%, thanks in part to a pickup in government spending in February. That left a monthly trade surplus of $4.84 billion -- the smallest in three years and a fraction of January's $39.11 billion.

Meanwhile Chinese government data Thursday showed that lending jumped again last month, but weak growth in industrial output suggested the surge in credit isn't yet translating to a strong pickup in real economic activity.

New yuan loans in February totaled 1.07 trillion yuan, according to the People's Bank of China. That was lower than January's record 1.62 trillion yuan, but 827.3 billion yuan higher than a year earlier. The figure reflects ample liquidity in the banking system, which has become a crucial part of Beijing's push to boost China's economy.

Industrial production in the first two months of the year rose by 3.8%, a slower rise than some economists expected.

China's worsening trade situation has led to a spate of factory closings and layoffs. The latest figure underscores the extent of the collapse in global demand for goods, and shows China approaching the starker export declines recorded by other Asian countries.

With demand in major markets contracting, China's export growth is unlikely to recover soon. Analysts say smaller trade surpluses could be here to stay, though the shift isn't likely to be severe enough to rattle the U.S. bond market.

"I think there's definitely a turning point in the trade balance," said Ken Peng, an economist for Citigroup in Shanghai. He now expects the monthly trade surplus to be in the range of $5 billion to $15 billion in coming months.

The trade surplus pours a stream of foreign-currency export earnings into China, funds that the central bank buys in exchange for local currency and holds in its official reserves. At the end of 2008, those holdings totaled $1.946 trillion. Most of the reserves are in the safest investments available: government debt issued by the U.S., Japan, or European nations. That means there are always questions about how much money China will funnel into that debt, especially as governments ramp up issuance to fund stimulus plans.

The steady increase in China's official reserves has made it the U.S.'s largest single creditor. Brad Setser and Arpana Pandey of the Council on Foreign Relations estimate that, taking into account holdings of state-owned banks and sovereign-wealth fund, China held about $900 billion in Treasury bonds and bills at the end of 2008.

That sum should continue to grow, if not at the pace of recent years. Stephen Green, China economist for Standard Chartered, forecasts that China's current-account balance -- a broader measure of its trade position -- will fall to $406 billion in 2009 from $440 billion in 2008. He estimates foreign-exchange reserves will increase by $300 billion this year, after $420 billion in 2008.

"This means its appetite for U.S. debt will be smaller," he wrote in a report this week, so other buyers will have to pick up the slack if interest rates are not to rise.

At the moment, U.S. rates remain low and there's no shortage of buyers, foreign or domestic, for Treasury debt. The global market turmoil has pushed investors everywhere to pile into U.S. government bonds, which are seen as one of the few safe investments left.

For instance, foreign central banks' holdings of U.S. Treasurys at the Federal Reserve have continued to climb in recent weeks, reaching $1.783 trillion on Mar. 4, compared to $1.708 trillion at the beginning of the year. In fact, the Fed's figures show a net increase of $44.66 billion in such Treasury holdings in February - significantly more than the $24.15 billion net increase in January, when China ran a larger surplus.

And while the U.S. has been heavily dependent on foreign purchases of Treasury bonds in the past, that's partly because its own residents were saving too little to buy many of them. That is changing now: the U.S. personal savings rate rose to 5% of disposable income in January. It had been less than 1% as recently as August. More household savings could provide an additional source of demand for bonds.

By ANDREW BATSON

Source >  Wall Street Journal | March 12