Trade war drives down China’s current account forcing new reliance on foreign investment
- China’s current account balance for 2018 is expected to show a modest surplus before posting deficits in coming years
- Shift will put increasing downward pressure on yuan exchange rate and greater need for foreign investment
The trade war with the United States is expected to accelerate an ongoing structural change in China’s current account balance, making it a capital importer that buys more from the rest of the world than it sells to it.
China’s shift to relying more on foreign money means the yuan’s exchange rate will face increasing downward pressure over the longer term to ensure to ensure adequate inflows of capital.
This also means China will need to implement more transparent policies to attract foreign investors and relax capital flow restrictions so that they can repatriate their money.
However, China’s efforts to open up its capital account have so far been lopsided as Beijing encourages foreign investors to invest more money in the country while also continuing to strictly control capital outflows by Chinese individuals and businesses.
Official data for China’s current account balance for 2018, due to be released in April, is expected to show a modest surplus, before falling into deficit in coming years, analysts said.
That will be in sharp contrast to the large global surpluses that China posted until a few years ago after China’s current account surplus peaked at US$420 billion, or 9.9 per cent of gross domestic product (GDP) in 2007 before steadily declining.