A key pillar of China’s economic boom is crumbling away, a change that analysts believe could make it harder for Beijing to accede to America’s demands to slash the trade gap between the two countries.
China’s current account for the first three months of the year recorded the first quarterly deficit in 17 years and the country is now facing the possibility that it will see its first full-year deficit since 1994 – a process that could be accelerated by Washington’s demands.
Customs figures for the first four months of the year show that China’s trade surplus with the US exceeded the country’s overall surplus: in other words, China would be in deficit without its gains from the US.
Economists have warned that China may see unpredictable changes to its exchange rates and capital flows if its long-standing surplus in trade turned into a deficit – a scenario that would become a reality if Washington persuades Beijing to narrow the trade gap by US$200 billion.
A Chinese delegation will visit the United States next week to continue the discussions on trade, and Zhou Hao, senior emerging markets economist with Commerzbank in Singapore, said Beijing would try its best to avoid a dramatic fall in its surplus.
“A current account deficit is not a good thing for emerging markets, because it means a demand for external funding and in some circumstances could be accompanied with many [economic and political] conditions,” he said.
The government has previously insisted that China is not deliberately pursuing a trade surplus and the current situation reflects its role in the global value chain – if China imports components and assembles them and then re-exports the finished products, it will result in a surplus.
In reality, the so-called twin surplus in both its current and capital accounts has allowed Beijing to accumulate the world’s largest foreign exchange stockpile – it peaked in the middle of 2014 at US$4 trillion – and to print money at home to help growth without causing a sharp depreciation in its currency.
But the situation has started to change as Chinese people buy more foreign products and spend more abroad while speculative capital has retreated from China.
China’s foreign exchange reserves dropped to a five-month low of US$3.125 trillion in April, despite Beijing’s efforts to encourage inflows and to curb outflows.
China’s current account surplus reached 9.9 per cent of its gross domestic product in 2007, but dropped to 1.3 per cent in 2017, and according to Standard Chartered, the ratio could fall to 1 per cent this year and 0.5 per cent in 2019.
In cargo trade, China had a US$76.8 billion surplus in the first four months of the year, with its surplus with the US reaching US$80.4 billion, according to China’s customs administration.
Huang Yiping, a professor at the National School of Development of Peking University, told the South China Morning Post on the sidelines of an investor conference in Beijing on Tuesday that there were no short-term fixes to the trade imbalance between China and America, which the US says stood at US$375 billion last year.
“Of course, you can say China can buy more planes or semiconductors, but they [the US] might not want to sell,” Huang said.
Shen Jianguang, chief economist at Mizuho Securities Asia, warned that the trade talks may fail to address structural problems.
He gave the example of liquefied natural gas sales, saying China may import less from the Middle East if it was forced to buy more from the US to cut the trade deficit.