China’s first current account deficit for 17 years ‘could signal fundamental shift’
New figures come after 25 years of China being able to take its current account surplus for granted
Beijing has registered its first quarterly current account deficit in nearly 17 years, at a time when Washington has seized on the huge bilateral trade imbalance to pressure for more Chinese imports, wider market access and a level playing field.
The State Administration of Foreign Exchange (SAFE) said on Friday that China had recorded a deficit of US$28.2 billion in its current account – which covers merchandise and service imports and exports – for the first three months of 2018, in what is the first quarterly deficit since the second quarter of 2001.
SAFE tried to play it down by saying that the rare red figure in the current account was a result of “seasonal factors”, but economists said it could signal a fundamental shift in China’s international payment position, which in turn is a result of global economic rebalance in the last decade.
Ding Shuang, the chief China economist with Standard Chartered in Hong Kong, wrote in a note that China has run a current account surplus on an annual basis in the past 25 years and “people tend to take [China’s] surplus for granted”.
The situation that people have been taking for granted for a quarter of a century was about to change, Ding noted. “A moderate shock, against the backdrop of intensifying trade frictions, can push China’s current account into deficit,” he wrote.
China’s current account surplus, which included a surplus from cargo trade, was once seen as an indicator of global economic imbalance.
In 2010, the United States had tried to impose on China and other “surplus countries” a policy that a country’s current account surplus should not exceed 4 per cent of its GDP, but Beijing rejected the suggestion.
The current account surplus also helped Beijing to offset an exodus of hot money in the second half of 2015 and 2016.
This key source of hard currency for Beijing is starting to dry up. The merchandise trade surplus dropped 35 per cent year-on-year to US$53.4 billion in the first three months of this year, SAFE said. Meanwhile, the service trade deficit, including tourism, was US$76.2 billion, resulting in an overall current account deficit, according to China’s official balance of payment figures.
The previous deficit dated back to 2001, when the country joined the World Trade Organisation, which paved the way for the explosive growth of its exports and an economic take-off in general.
The world’s top exporter, China has been moving towards a shift away from its reliance on exports for growth towards domestic consumption. But its trade surplus with the US remained considerable.
The bilateral trade gap hit a record high of US$370 billion last year, according to US statistics, and the US President Donald Trump has been vowing to narrow it.
China and the US concluded two days of trade talks in Beijing on Friday, after a verbal exchange of fire for 1½ months. According to a draft framework of US demands seen by the South China Morning Post, Washington asked China to cut the trade deficit by at least US$200 billion by the end of 2020.
No major agreements were achieved at the talks.
“While we see a full-blown trade war as only a tail risk, an eventual grand bargain could still involve China importing more and opening up its services sector,” said Ding, of Standard Chartered.
At the same time, China’s trade surplus is unlikely to disappear overnight. Iris Pang, the chief China economist for ING Bank, wrote in a note that “a persistent trade deficit” is still unlikely to take place, although “a smaller trade surplus is more likely” as tensions over trade continue.