Question

What would happen to the trade balance and the net capital outflows of China should Chinese domestic saving fall?

Answer 1

If domestic savings fall, ceteris paribus domestic investment is higher than domestic savings. Since (Savings - Investment) equals Trade balance (= Exports - Imports), lower domestic savings will lower (Savings - Investment), therefore decreasing trade balance in China.

Also, savings being the supply of loanable funds, the loanable funds supply curve shifts leftward, increasing interest rate. At higher domestic interest rate, global investors will increase their investment in China, so capital inflow will rise and capital outflow will fall as a result of higher domestic interest rate. There will be an upward movement along the Net Capital Outflow schedule, which means there will be a fall in net capital outflow in China.