Behind the headlines, China’s large current account surpluses are becoming a thing of the past
- The transformation of China’s balance of payments position will have a significant impact on its economy
- It’s necessary to understand how its large surpluses came to be, and how, as Beijing seeks to rely less on investment and more on consumption for growth, much smaller surpluses – or even a persistent deficit – may become the norm
With a torrent of tweets and headlines about the Sino-US trade war, economic data and erratic central bank policies, it is easy to get distracted by short-term noise and lose sight of the big picture. Alongside other mega trends in China, such as long-term technology progress and changing demographic patterns, the transformation of China’s balance of payments also stands out.
Before delving into the details, it is worth first explaining the importance of balance of payments. The balance of payments, which consists of two general accounts – the current account and capital account – essentially captures the economic and financial interactions between the country and the rest of the world.
In general terms, the current account records all trade-related activities, while the capital account documents how the trade surplus (or deficit) is being invested (or financed). The balance of payments should, therefore, in theory, always balance.
While the sum of the current account and capital account is always zero, their respective balances can vary over time. In China’s case, the current account has recorded surpluses since the early 1990s, with the amounts swinging wildly. There was a noticeable upswing in the early 2000s after China entered the World Trade Organisation, which made it a formidable competitor in international trade.
While the success of the export-driven growth model helped create jobs and economic prosperity, the large current account surpluses also brought challenges.
