Trade
China’s current account shrinks, but for how long?
Author: Brad Setser, Council on Foreign Relations
There was one point of consensus among financial analysts and journalists following China at the turn of 2019. China was headed toward a current account deficit and would cease to be a net lender to the world. It wasn’t an implausible forecast. China’s current account deficit fell over the course of 2018 and US tariffs seemed set to knock China’s exports back a notch or two. But the potential impact of this swing was often over-stated and does not characterise the real risks.
A small current account deficit isn’t that different from a small current account surplus. China had the necessary fundamentals — little external debt, a high level of reserves relative to its short-term debt and more state assets abroad than external debt — that would allow it to run a modest external deficit with little consequence. China wasn’t going to be forced to change its policy approach because of a statistically insignificant swing into external deficit.
And this forecast now suffers from one substantial problem. China’s trade and current account surplus surprised most and jumped back up in the first part of 2019. Exports aren’t doing that well, but imports are down substantially. The current account surplus is now around 1.5 per cent of China’s GDP — and it is more likely to reach 2 per cent of GDP than turn into a deficit.
The fall in China’s surplus in 2018, it turns out, was likely a reflection of the big stimulus that China implemented in 2016 and 2017 and perhaps some stockpiling by Chinese technology companies Huawei and ZTE ahead of President Donald Trump’s trade war with China. China pulled back on that stimulus over the course of 2018 — and only moderately reversed course as the trade war intensified. Without the stimulus from unconstrained credit growth through shadow banks, China’s march toward current account balance went into reverse.
There was also a technical problem with a lot of the forecasts that projected a future Chinese external deficit. They were based heavily on a single outlying data point — the large current account deficit that China ran in the first quarter of 2018. The US$35 billion deficit in the first quarter of 2018 turned into a US$50 billion surplus in the first quarter of 2019, generating an annualised swing of close to US$300 billion dollars.
But rather than focussing on the precise current account balance, it is worth stepping back and considering China’s overall trade. China still runs a large surplus in manufactured goods — a surplus that now totals US$1 trillion. China runs an enormous deficit in commodities and a decent sized deficit in tourism and educational services.
Australia should understand this pattern well — Australia exports commodities, vacations and degrees to China and gets a lot of manufactures back in return. The size of the commodity deficit is a function of commodity prices — and the manufacturing surplus is now rising due to weakness in China’s imports and decent growth in China’s exports to markets other than the United States.
The big surplus in manufactures now more than covers the deficit in commodities as well as the tourism deficit (which is very poorly measured), leaving China with a substantial overall trade surplus — one that isn’t likely to go away in the near future.
But focussing on the current account also misses a potentially more important change in China’s balance of payments. China, more or less, stopped adding to its reserves. The current account surplus — plus some inflows into China’s bond and equity markets — now funds a mix of large-scale lending by the state banks, including for the Belt and Road Initiative, and the build-up of offshore assets by private Chinese savers, including capital flight. These structural outflows reduced the need for the People’s Bank of China to intervene in the foreign exchange market as they balance the net inflow of foreign exchange from trade.
That change happened five years ago. China’s government is no longer a big buyer of the rest of the world’s bonds, even though China still runs a modest current account surplus.
The risk to the world right now isn’t that China will swing into a small external deficit — a rise in China’s imports or a slowdown in China’s exports that opens up more space for other exporters of manufacturers globally would be welcome right now. The risk to the world is that China swings back into a large external surplus.
China’s national savings rate is still exceptionally…
Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
China and Germany maintain a strong bilateral relationship, rooted in economic cooperation despite ideological differences. Recent visits and agreements focus on expanding trade and addressing mutual concerns, navigating challenges while nurturing ties.
Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
As the second and third largest global economies, China and Germany’s economic interdependence is crucial. Germany emerged as China’s primary trading partner in 2023, with trade values reaching €254.4 billion (US$280 billion). In response to global scrutiny, Germany has taken a balanced approach, emphasizing economic stability over political discord. This was evident during Scholz’s prior visit in November 2022, where his diplomatic tone contrasted with broader EU sentiments.
Facing Challenges Together
Despite increasing public skepticism in Germany regarding China’s global influence and human rights issues, both nations continue to seek common ground. Their October 2023 Joint Statement highlights intentions to pursue cooperation in areas like carbon neutrality and open markets. To navigate these complex terrains, Germany can utilize its institutional frameworks to enhance dialogue, while also considering supply chain diversification to reduce dependency on China. The intertwining nature of their economies suggests that, despite challenges, both countries will continue to prioritize their substantial trade relations.
Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.
Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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