Wednesday, March 11, 2009

Chinese Exports Fall--Economic Adjustment

According to the Wall Street Journal, Chinese exports have fallen sharply (26% from a year earlier), which has reduced their trade surplus. This is a result of both the economic slowdown as well as exchange rate adjustments (actually, these are linked, but I don't want to be too wonkish here). At first blush, this appears to be a "good thing," and it is part of a necessary adjustment in our economy. The issue to watch is that the trade surplus has given the Chinese cash, which they have reinvested in U.S. Treasuries. As the trade surplus declines, so does their available cash. As the story points out, however, this decline in purchases has been offset by an increase in the U.S. savings rate to 5% of disposable income (again, for economics wonks, this is obvious). So, we are buying more of our own debt. This trade balance will deserve attention in the near term to see if this trend continues.