Expect a U-shape for China’s current account
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China’s current-account surplus is back in the spotlight amid the US quest to reduce its bilateral trade deficit with the Asian country. However, the reality is that China’s current-account surplus has dropped significantly from its peak during the 2007–08 global financial crisis.
China’s current-account surplus is back in the spotlight amid the US quest to reduce its bilateral trade deficit with the Asian country. However, the reality is that China’s current-account surplus has dropped significantly from its peak during the 2007–08 global financial crisis.
From China’s perspective, a narrower current-account balance may be helpful as it could ease the concerns of the rest of the world about China’s export machine. But it also has disadvantages, namely reducing China’s ability to respond to unexpected shocks, as the accumulation of foreign-exchange reserves from a trade surplus would in principle stop, if not retract. While most Western economists would argue that China’s external buffer, namely forex reserves, are excessive, this might not be the view of China’s leadership, especially after the recent experiences with US-led disruptions and other types of tail risks.
Over and above the ongoing reduction of China’s current-account surplus, the US push for China to reduce its bilateral trade surplus puts even more weight on the — by now consensus — view that China’s current-account surplus is an issue of the past and that we should expect a structural deficit down the road.
This prediction might not come true, however. The most obvious reason, at least in the short term, is the breakdown of trade negotiations between the US and China, but this is not the whole story. There are other important reasons, related to the very nature of China’s reduced current-account surplus, that lead us to expect a reversal of the current trend, back toward a renewed surplus.
In fact, trade in goods contributed to less than one-third of the shrinking current-account surplus, with services (especially tourism) explaining the rest. The rising tourism deficit appears to be easily…
