New Advances in China’s Balance of Payments

Global economy was fulfilled with ups and downs in 2020 due to the COVID pandemic,which added more volatility to international investments and trade. During the time,East Asian economies had done a better job in epidemic control,and thus has achieved faster economic recovery. Among them,China has achieved positive economic growth and steady improvement in its international payments. In 2021,with the development and application of vaccines,the world economy is likely to usher in faster and comprehensive recovery. China is going to face a different external economic environment during the normalization of epidemic prevention and control,and there will be uncertainties in foreign investment and trade. How would these factors affect our balance of payments in 2021? At a roundtable discussion organized by China Forex,Zhang Liqing,Director of International Finance Research Center,Central University of Finance and Economics,Chief Economist of Price Waterhouse Coopers China and Zhang Ming,Deputy Director of Institute of Finance and Banking,Chinese Academy of Social Sciences,Deputy Director of National Institution for Finance and Development,shared their opinions on this topic. The conversation,which follows in edited form,was moderated by Zhong Wei,China Forex deputy editor.

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Zhong Wei: I’d like to welcome our two guests. China’s foreign trade achievements was not a bad one in 2020,and its growth with the “Belt and Road” economies and the neighboring economies in East Asia was particularly eye-catching,which strongly supported the stability of the global supply chain. So,what are your comments on China’s foreign trade performance in the past year? Of course,we know that there are many factors restraining the growth of our foreign trade,such as the rising shipping price,poor container turnover and exchange rate fluctuations. In 2021,manufacturing industry in Western economies may also speed up recovery,while the recovery of service trade would not be optimistic due to continued restriction on cross-border movement of people. In your view,will China’s foreign trade maintain such strong growth in 2021?

Zhang Liqing: The strong recovery of Chinese exports in the second half of 2020 was really a surprise. The manufacturing industries of severely affected countriesonce suspended or drastically reduced productionleading to sharp decline of supply capacity. And these countries were thus heavily dependent on China’s export during the times. The shift from office work to online work has also drastically increased their demand on China’s electronic products. Looking into 2021,our export will largely maintain positive growth trend,but might not be as strong as the past year. On one hand,the recovery of manufacturing capacity in developed countries will reduce their dependence on Chinese exports to a certain extent. On the other hand,the growth and export recovery of emerging market economies in Asia and Latin America will also compete with us. Additionally,the continuous appreciation of renminbi will weaken the export capacity of some of our companies.

Zhang Ming: We should admit that the strong performance of China’s foreign trade in 2020 has almost exceeded everyone’s expectation. The year-on-year growth rate of exports in US dollars rose from -17.2% in January to February 2020 to 21.1% in November 2020; trade surplus in goods rose from - US$7.1 billion in January to February 2020 to 2020 US$75.4 billion in November the same year. The contribution of net exports of goods and services toward GDP growth turned from negative 1 percentage point in the first quarter to a positive 0.6 percentage point in the third quarter. These data reflect the strong resilience of China's foreign trade under the impact of the epidemic. During the second and third quarter last year,China has become the only reliable intermediate link in the global industrial chain,As a result,the proportion of China’s exports in global imports surged from 14% to 18% in 2020. In my opinion,our export growth in 2021 will be higher than the first half but weaker than that in the second half of 2020. The annual export growth rate in US dollars may remain around 5% to 6%.

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Zhong Wei: The all-round and high-level opening up of China’s financial sector has made the inflow of foreign capital under the financial transaction account more important than the current account surplus. Currently,China’s bond and stock markets are still price depressions among global assets,does this indicate a new focus on China’s “double surplus” in its international balance of payments? And will they impact on exchange rate policy?

Zhang Liqing: Currently,due to the great recession of global economy and the obviousdifference in interest rates between China and other countries,China’s bond and stock market are indeed the price depressions among global assets. Looking forward to 2021 and the years to come,as long as China maintains a good growth prospects,adhere to healthy macroeconomic policies,and continue to improve the investment and business environment through further reform and opening up,we will continue to see the net inflow of foreign capital. Additionally,due to population aging,our savingswill maintain a long-term downward trend. And investment rate will ultimately surpass saving ratein the future,whichindicates the end of China’s normalized current account surplus. “Double surplus” will eventually become a history. We should know that moderate current account deficit and net capital inflow does not necessarily mean a bad combination.In fact,it is likely to become an important feature of the “dual circulation” new development pattern. It will be a necessary choice for China to achieve a high-level economic equilibrium in an open environment,and it will also become the precondition for maintaining a basically stable exchange rate of renminbi.

Zhang Ming: Based on current data,China’s balance of payments in 2020 shall be a combination of large-scale current account surplus and manageable financial account deficit. On one hand,our current account surplus has exceeded everyone’s expectation under the impact of the epidemic. On the other hand,China’s successful control over the pandemic has widen the growth and interest rate gap between China and other countries as of the second quarter of 2020,large scales of securities investment flew into our ma