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Chinese trade deficit?

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economy2 April 9, 2010 (Chinavestor) China is going to release March trade balance data tomorrow - a possible big shocker for many. February trade surplus stood at $7.6 billion but consensus estimate puts that number to a -$390 million, or a trade deficit. This will be the first such monthly reading in six years. China's trade surplus was $196.3 billion in 2009 after a record $263 billion a year earlier. Rising commodity prices and increase in consumer goods are responsible for the shrinking trade surplus.

 

BNP Paribas analysts expect China to achieve a sustained trade balance as early as 2010 but analysts at Morgan Stanley and JP Mogran & Chase think that's further off. Assuming that Chinese trade surplus might disappear, appetite for U.S. Treasuries will inevitably shrink unless yields go higher. The yield on 10-year T-bills has been on the rise as is evidenced by the following chart.

T-bill_yield_2010Q1

Rising interest rates is going to increase the cost of borrowing, unless higher inflation compensates for the higher yield. This might be just the case as the U.S. economy is showing signs of recovery.

The model of the last decade, when U.S. trade imbalance was compensated by a ferocious Chinese appetite for U.S. debt, is over.  As Chinese demand for debt is going away, the U.S. has to work on its trade balance. This is where the stronger Yuan can help.



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