China’s economic slowdown to have ‘global repercussions’ beyond trade, hinder current account recovery, IMF says
- International Monetary Fund’s annual ‘External Sector Report’ highlights downside risks of China’s slow post-Covid economic recovery
- Weaker than expectations, China’s economy grew by 6.3 per cent in the second quarter, year on year, adding to concerns over momentum and its full-year target
China’s slow post-Covid recovery could hinder the anticipated narrowing of global current account balances this year, while the slowdown in the world’s second-largest economy will also pressure vulnerable emerging markets together with a strong US dollar, the International Monetary Fund (IMF) said on Wednesday.
“A weaker-than-expected recovery in China would affect its trading partners directly, the largest of which are located in Asia and the Pacific,” the Washington-based agency warned.
The slowdown would also have global repercussions beyond China’s major trading partners
The fund said earlier this year that China would contribute to more than 30 per cent of global growth this year.
The IMF, though, did not adjust its annual growth estimate of 5.2 per cent for China or its global growth prediction of 2.8 per cent made in the April edition of its “World Economic Outlook”.
“The slowdown would also have global repercussions beyond China’s major trading partners by affecting commodities for which China accounts for a large share of global demand,” the latest IMF report added.
China is the world’s major buyer of crude oil from Saudi Arabia and Russia, Australian iron ore, Brazilian soybeans and American corn.
The IMF estimated that the widening of global current account balances – a record of a country’s international transactions with the rest of the world – last year could be reversed in 2023.
China has a major merchandise trade surplus as it exports more than it imports, but it also is reported to have a large service trade deficit.
In the first half of the year, China’s merchandise trade surplus was US$409 billion, up by 9.7 per cent from a year earlier, customs data showed.
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China’s current account surplus in the first quarter stood at US$81.5 billion, according to the State Administration of Foreign Exchange.
The IMF, however, said China’s trade surplus was likely to shrink in the remainder of 2023 as outbound travel and spending are expected to soar.
This may help narrow global current account balances later in the year, along with an increase in public savings in the United States and falling commodity prices, it added.
Increasing portfolio investment, on the back of China’s gradual financial opening, is expected to diversify its foreign assets and liabilities further
Around 168 million cross-border trips were recorded in China in the first half of the year, with mainland Chinese travellers contributing slightly less than a half, according to data released by the National Immigration Administration on Wednesday.
The remainder of the trips were mainly made by residents in Hong Kong, Macau and Taiwan, it said.
“Increasing portfolio investment, on the back of China’s gradual financial opening, is expected to diversify its foreign assets and liabilities further,” it said.
After a slight pickup in March, the cut continued, with holdings in May dropping by US$22.2 billion to US$846.7 billion, the lowest level since May 2010, according to the US Department of the Treasury.
Overall, China’s external position last year was “broadly in line with the level implied by medium-term fundamentals and desirable policies”, the IMF said.
However, Beijing should accelerate market-based structural reforms, shift fiscal policy support toward strengthening social protection to boost private consumption and further increase exchange rate flexibility to help absorb external shocks, it suggested.
China’s current account surplus accounted for 2.2 per cent of its gross domestic product last year, the IMF added.
The surplus, though, is expected to narrow and return to its downward trend as Covid-related factors unwind and rebalancing toward private consumption resumes, the report said.
The IMF also said in its 2022 assessment that Beijing had no large intervention into the foreign exchange markets.
