CHINA’S REBALANCING

A CHINA REBALANCING ACT?

Stephen Grenville

Business Spectator, April 30, 2012

In 2010, China's current account surplus was over 10 per cent of GDP. Just a year later the surplus had fallen to less than 3 per cent as imports grew faster than exports. The International Monetary Fund is expecting a further fall to 2.3 per cent this year, before rising to around 4 per cent over the next few years.

Does this mean that one of the key international imbalances is disappearing?

Before we cross this off the list of international economic worries, we might recall the perils of forecasting the Chinese economy: just a year ago the International Monetary Fund was forecasting 6 per cent for this year's surplus, rising to 8 per cent later. The IMF says the main explanation for the turnaround is China's terms of trade: its import prices (mainly commodities) have risen and its export prices (manufactures) have fallen.

But that doesn't seem to be a new story. Similarly, weak world demand (especially from Europe and the US) is not a new story. Maybe the 30 per cent change in China's real effective exchange rate since 2005 (when the yuan was given a bit of room to move) has had something to do with it. With wages growing at 15 per cent a year, international competitiveness is quickly eroded.

The wider story of re-balancing should show up in the domestic counterpart of the external surplus (if an abstemious country spends less than it produces, it must be accumulating an external surplus). It's hard to see much re-balancing going on here: we might expect to see investment trimmed back as growth slows from over 10 per cent to 8 per cent. But investment is still running at almost half of GDP. We might expect to see consumption rising towards the 60-70 per cent of GDP seen elsewhere, but it is still below 50 per cent and falling.

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