China's Current Account — Basic Equilibrium

Renminbi volatility has intensified amid slower economic growth and mounting trade friction. This has aroused market concern about China's balance of payments. According to preliminary data from the State Administration of Foreign Exchange，the nation had a current account deficit of US$28.3 billion in the first half of the year while there was a US$78.4 billion surplus on the non-reserve capital account (including net errors and omissions) in the same period. Foreign exchange reserves，excluding the impact of valuation，increased by US$49.4 billion over those six months.

What conclusions can be drawn from that first half deficit and what can we expect for the full year for the current account and overall balance of payments? What measures need to be taken to prevent balance of payments risks? The following article attempts to answer those questions.

A Basic Balance

The current account deficit reveals an external economic imbalance. In theory，the size of the current account position as measured against the gross domestic product is an important indicator that can be used to determine whether a country's external economic balance is in equilibrium. The ratio of the current account surplus ¡ª or deficit ¡ª to the GDP should therefore be kept at reasonable levels. In the first half of the year，the ratio of China's current account deficit to GDP was -0.4%，far below the international warning level of 4%.

The equilibrium in the current account balance should be seen as a result of economic rebalancing. From 1994 ¡ª when the exchange rate in the domestic financial market was merged with the international market rate ¡ª until 2014，China had long been in external economic imbalance with a "double surplus" in the current and capital accounts. That resulted in repeated increases in foreign exchange reserves (see Chart 1). At the Central Economic Work Conference in late 2006 it was stated that the key problem in China's balance of payments situation had shifted from a foreign exchange shortage to an excessively large trade surplus and fast-growing foreign exchange reserves. It was also stressed that trying to keep the balance of payments in basic equilibrium was an important task for maintaining macroeconomic stability.

Since then，China has been actively committed to "expanding domestic demand，adjusting the economic structure，reducing the surplus and promoting a balance". The current account surplus has fallen from a peak of 9.9% of GDP in 2007 to less than 4% in 2010 and about 2% more recently (see Chart 2). This has been the effect of China's effort to shift the driver of its economy from investment and exports to a combination of investment，consumption and net exports，as well as higher incomes of domestic residents and increased consumption. However，just as there will be two-way fluctuations in the currency when the exchange rate is balanced and reasonable，there will swings between surplus and deficit when the current account balance is in basic equilibrium.

Equilibrium in the current account balance means that the renminbi exchange rate tends to be balanced and reasonable. Since the 1994 merger of the exchange rates for the domestic financial market and the international market，and more obviously since the July 2005 exchange rate reform，the renminbi has made large gains against individual currencies and against a basket of currencies. However，the proportion of Chinese exports to total global exports rose from 2.8% in 1994 to 7.3% in 2005 and 13.8% in 2015 (see Chart 3). This was accomplished as China shifted from foreign trade based on low price products to more quality oriented goods.

In the first half of this year，the renminbi remained fairly steady，both against individual currencies as well as a basket of currencies. In this environment，China's exports grew rapidly，with a 13% gain in the first half of the year ¡ª a growth rate that was up five percentage points from the same period in the previous year. However，due to the 20% rise in imports，the trade surplus during the same period was down 22% year-on-year. In the first five months of this year，the export volume index averaged 107.6，which was basically the same as the average of 107.4 in the previous year. The International Monetary Fund said in its External Sector Report that the renminbi was roughly consistent with key fundamentals such as China's ample foreign exchange reserves and the significant improvement in external imbalances since the financial crisis.

The equilibrium on the current account has resulted in a number of benefits，such as promoting balanced，coordinated and sustainable economic development. It has reduced the dependence of China's economy on external demand and in turn lowered the risk from external shocks. In the first half of this year，net exports of goods and services made a negative contribution to economic growth，but investment and consumption kept the economy running smoothly at a reasonable pace. At the same time，we have seen improved macro-regulation.  For many years，the "double surplus" in the balance of payments has resulted in continued increases of foreign exchange and that has restricted the independence of the central bank's monetary policy. But with the current account balance largely in equilibrium，the accumulation of foreign exchange reserves has eased (see Chart 2). That has limited money supply creation and in turn expanded the central bank's maneuvering room in implementing domestic monetary policy.

By achieving equilibrium on the current account，external pressure for policy changes has eased and China has been able to take international financial and diplomatic initiatives that otherwise would have been out of reach. In the past，China's excessive current account surplus was a key source of trade friction and international criticism alleging currency manipulation. However，since 2012，China's current account balance has maintained an equilibrium，and this has facilitated a rebalancing of the global economy. Pressure from the international community for a revaluation of the renminbi has gradually dissipated and the exchange rate has ceased to be a topic in bilateral economic and trade discussions.

In the first half of the year there was good news on the trade front as China had a US$8.7 billion surplus in goods and services. The first quarter saw a deficit of US$21.8 billion but that shifted to a surplus of US$30.5 billion in the second. As a result，the ratio of the current account deficit to the GDP in the first half was down 0.7 percentage point as compared with the first quarter alone. From the third quarter of last year to the second quarter of this year，China had a current account surplus of US$68.3 billion，and that represented 0.5% of GDP (in 1995 and 1996，the ratio was 0.2% and 0.8% respectively) (see Chart 2).

With the intensifying trade friction between China and the United States and China's initiative to expand imports，China's surplus in merchandise trade is likely to decline，though it will remain sizable. One reason is that the savings-to-investment relationship that determines net exports is a slow variable. China's last annual current account deficit appeared in 1993，阅读全部文章，请登录数字版阅读账户。 没有账户？ 立即购买数字版杂志