China’s surplus with trading partners falls into balance

China looks to consumer to help economy weather trade war

China’s economic relationship with the rest of the world is roughly in balance, according to the IMF — a significant change after years of criticism from other countries that China posed a risk to the global economy. 

The country’s current account surplus has dropped to close to zero, the IMF reported on Wednesday; for the first time since 2012, when the IMF began reporting on the imbalances that afflict the world’s major economies.

At just 0.4 per cent of GDP in 2018, China’s current account surplus declined by 1 percentage point year on year, according to the IMF.

China’s “external position” is “broadly in line” with “medium-term fundamentals and desirable policies”, the IMF said.

For years China’s current account had showed it to be a big net lender to the world, running a surplus as high as 10 per cent of GDP in 2007. But in recent years its economy has become increasingly reliant on domestic demand — as opposed to exports and foreign investments — and that has helped rebalance its trade position.

“There’s obviously a lot more still to be done, but it’s important to recognise some of the things that have been done, including increased currency flexibility and reduced reliance on external demand,” Gita Gopinath, the IMF’s chief economist, told the Financial Times.

“We want China to pivot towards more consumption-driven growth, while at the same time being careful about a further build-up in financial risks,” she added. 

Zhang Jun, head of the school of economics at Fudan University in Shanghai, said the trend was likely to continue.

“Policy has been very clear that China will speed up opening the domestic market and increase imports,” he said, adding that current account deficits were possible in future due to the rapid growth in imports of services, of which tourist spending is the largest component.

“The merchandise trade has not been able to create a surplus to offset the deficit from service trade,” he said.

However, some economists believe that China’s current account surplus could rise again, because some of the factors driving the decline, like the recent fiscal stimulus, could wear off.

The virtual elimination of China’s current account surplus means that trade imbalances are now mostly concentrated in advanced economies, the IMF said. 

Overall current account surpluses and deficits accounted for about 3 per cent of global GDP in 2018, half of their 6 per cent level in 2007 but only slightly lower than their 3.5 per cent share in 2013.

The eurozone posted a current account surplus of 2.9 per cent of GDP in 2018, slightly narrower than 2017, as Germany’s surplus fell to 7.3 per cent from 8 per cent. Despite the improvement, the IMF still judged Germany’s external position to be “substantially stronger” than fundamentals, and called for more “growth-oriented fiscal policy” from Berlin.

The US current account deficit was unchanged at 2.3 per cent of GDP, which translated into a “moderately weaker” external position, the IMF said. It suggested the US needed fiscal consolidation, structural reforms and the removal of recently imposed tariffs.

The fund also said the UK current account deficit had deteriorated last year from 3.3 per cent to 3.9 per cent, and was expected to worsen further to 4.2 per cent of output this year. 

The IMF has warned that countries should not be tempted to use protectionist trade measures to reduce current account balances, as such policies could backfire.

“Our position is, and has been, that tariffs won’t solve imbalances, but will come at the expense of domestic and global growth,” Ms Gopinath said. “This does not mean that there are not legitimate concerns about the multilateral trading system, which will need to be addressed for a durable resolution of trade tensions.”

“If we want to close these imbalances they rest much more on macroeconomic policies and structural reforms,” she said. 

Next week, the IMF will update its forecast for global growth, which currently predicts an expansion of 3.3 per cent this year, accelerating to 3.6 per cent in 2020.

In the report released on Tuesday, the IMF said that the world could expect a hit to growth amounting to 0.3 per cent of GDP next year because of recently announced and threatened US tariffs on Chinese products. That would come on top of the 0.2 per cent hit to global GDP caused by last year’s levies.

Additional reporting by Tom Hancock in Shanghai

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