The growth of Chinese tourism has helped shrink China’s overall current account balance with the rest of the world to almost zero. Photo: AFP
by Tom Holland
by Tom Holland

The truth about China’s economy that Trump won’t get: there is no surplus

  • A major economic shift has taken place which has all but eliminated the structural surplus in China’s current account
  • And it’s good news for the global economy, even if Trump – and most other observers – are struggling to see it

When Donald Trump complains about China’s trade practices, he inevitably points at China’s monster trade surplus with the United States as evidence the Chinese are cheating.

At first glance, it looks as if the US president might have a point. According to US Census Bureau data, over the 12 months to October China ran a US$410 billion merchandise trade surplus with the US – the biggest such imbalance on record.

But to focus on China’s bilateral trade surplus with the US is misleading. Viewed in broader terms, China’s trade imbalance shrinks. Over the same period its overall goods trade surplus with the world was US$360 billion.

And viewed in the broadest terms of all, it disappears altogether. Over the first nine months of last year, China actually ran a current account deficit.

In effect this means China was running an overdraft with the rest of the world.

This deficit may not last; there are good cyclical reasons to think China’s current account is likely to swing back into a small surplus this year.

Nevertheless, the shift which has seen China’s current account balance shrink from a surplus equal to 10 per cent of its gross domestic product 10 years ago to near zero today is a major structural change which will have far-reaching implications for the global economy.

President Donald Trump: can’t get his head around a shift in China’s current account. Photo: AP
Most observers, including Trump, have yet to get their heads around this change. The majority still think of China as a surplus country.

But generally when people talk about China’s trade balance, they are only thinking of its trade in physical stuff. China’s goods trade with the rest of the world is indeed in surplus. But over the last 10 years its trade balance in services has swung from zero to a deficit of around US$300 billion.

It’s not hard to find the explanation. China hasn’t taken to importing banking or insurance services from its trading partners. Nor are Chinese companies paying Google vastly more for advertising services.

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What has changed is that more and more Chinese tourists are travelling abroad – more than 130 million of them last year. And they are spending freely when they do, which counts in China’s balance of payments as an import of services.

As a result, China’s net imports of services have climbed to a level where they almost offset its net exports of goods. Add in the investment income repatriated by foreign investors in China, which more than offsets inflows from Chinese investments abroad, and China’s overall current account balance with the rest of the world has shrunk almost to zero.

This doesn’t mean that the pendulum is set to swing further, carrying China into a large external deficit. The most rapid phase of China’s outbound tourism growth is over, and over the last couple of years the increase in departures has slowed. This suggests the structural shift in China’s external balance is on pause.

Chinese tourists near the Eiffel Tower in Paris, France. When Chinese spend abroad, this counts in China’s balance of payments as an import of services. Photo: Alamy
Meanwhile, cyclical forces are likely to move China’s current account back into a small surplus this year. In 2018, the value of China’s net goods exports contracted because the price of key imports went up. The price of oil averaged US$72 a barrel last year, up from US$55 in 2017. At the same time, benchmark prices for semiconductors almost doubled. Together these increases knocked more than US$100 billion off China’s trade surplus in goods.

With China and other major economies set to slow this year, weaker demand is likely to lead to lower prices for both oil and semiconductors, pushing China’s current account balance back into a small surplus.

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Even so, the fact remains that over this decade, a major economic shift has taken place which has all but eliminated the large structural surplus in China’s current account.

It is hard to overstate the importance of this shift, both for China and for the global economy.

A large current account surplus is a sign that an economy is producing far more than it consumes domestically. By the same token, if an economy is consuming much less than it produces, it is saving far more of its income than it needs to finance its domestic investments.

In other words, China’s large current account surplus in the 2000s was the flip-side of the Chinese savings glut that many economists blame for causing the global financial crisis.

There are two ways to eliminate such a glut. An economy can ramp up its investment. Or it can save less of its income, which necessarily means consuming more. The recent decline in China’s investment rate indicates that it is not the former. So it must be the latter: China is saving less and consuming more.

In short, China’s economy is finally seeing the long-awaited rebalancing that former premier Wen Jiabao identified as essential to its long term health as long ago as 2007.

That’s good for China. It means less chance of over-investment, and greater sustainability in the long run.

And it’s good for the rest of the world. Economists frequently say that China has been the greatest contributor to global economic growth over recent years. Strictly speaking that’s true, but it is also misleading.

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China’s large surplus in net exports added to China’s growth. But it meant that the rest of the world ran a net export deficit with China, which subtracted from economic growth outside China.

Sure, China’s rise boosted individual economies that ran surpluses with China; Australia is a prime example. But for the rest of the world as a whole, the tyranny of arithmetic meant that China’s structural current account surplus detracted from economic growth.

Now that surplus is largely eliminated, China is no longer a drag on growth in the rest of the world as a whole. That’s clearly positive. Just don’t expect Donald Trump to see it that way.

Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 25 years