IF CHINA HAS NOT ALREADY,THEY MAY BE FORCED TO COMPLETELY ABANDON FINANCING U.S. DEBT

China’s trade surplus shrinks to $12.9 billion in September
Falling surpluses point to end of China’s role as `dollar recycler,’ analyst says Story
Comments Screener (19) Alert Email Print ShareBy Chris Oliver, MarketWatch
HONG KONG (MarketWatch) — China’s trade surplus contracted in September at a faster-than-expected pace, as the gap between what the nation sells to and buys from the world continued to shrink.

Analysts said the report adds to evidence that the country will swing to a trade deficit early next year.

China’s trade surplus in September totaled $12.9 billion, down about 56% from a year earlier. Median market expectations were for a surplus of $15.8 billion, according to calculations by Dow Jones Newswires.

Exports contracted 15.2% to $115.94 billion from a year earlier, a decline smaller than the 23.4% contraction in August, customs data showed Wednesday. Imports contracted 3.5% to $103.01 billion, compared with a 17% contraction in August.

On a monthly basis, China’s imports have rebounded 55% from lows seen earlier this year, while exports are up 19%.

“The bottom line is that import growth remains in excess of export growth,” said Eric Fishwick, CLSA Asia-Pacific Markets head of economic research.

If the trend holds, what lies ahead could be the end game of China’s ability to support U.S. debt markets via the recycling of its foreign-exchange stockpile.

“You have to worry about China no longer underwriting the very large federal deficit in the U.S.,” said Fishwick.

Generally speaking, China’s surplus peaked in the second half of 2007, when its monthly surpluses were around $25 billion to $30 billion, and have been trending lower ever since.

Technically China’s surplus peaked in January 2009 at $42.1 billion, but analysts believe this was an aberration prompted when domestic demand collapsed during the financial crisis. The trade surplus fell to $8.25 billion in June.

Fishwick forecasts China’s trade surplus will increase into the final months of 2009, owing to the seasonally strong export period, before swinging negative in either February or March next year.

China’s trade surplus in the first nine months ended Sept. 30 totaled $135.48 billion. Its foreign-exchange reserves climbed to $2.273 trillion at the end of September from $2.13 trillion at the end of June, data from the People’s Bank of China showed Wednesday.

In a new era of monthly trade deficits and a loss of inflows into its foreign-exchange account, China won’t be able to keep up its historical role as financier to global largess.

“It suggests a rise in global risk free [sovereign bond] rates and that clearly disadvantages deficit countries relative to creditor countries,” Fishwick said.

Wednesday’s data round out the trade picture, showing exports down 21.3% in the first three quarters, while imports were down 20.4%.

J.P. Morgan said it expects China’s exports to pick up as the global economy comes out of the sharpest downturn since World War II.

Bank lending rebounds
Other data released Wednesday showed lending by Chinese banks totaled 516.7 billion yuan ($75.68 billion) in September, accelerating from 410.5 billion yuan in August, according to data released Wednesday by the PBoC.

The new lending brings total loans issued in the first nine months of the year to 8.65 trillion yuan, a rise of 149% on year.

China’s broad money supply, as measured by M2, was up 29.3% at the end of September from a year earlier, compared with analysts’ expectations of a 28.5% rise.

“While the period of ultra-rapid credit expansion has passed, concerns about policy tightening in the short term appear to be overdone,” J.P. Morgan’s chairman and managing director of China equities, Jing Ulrich, wrote in a note Wednesday.

Chris Oliver is MarketWatch’s Asia bureau chief, based in Hong Kong.

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