## wpiea2019244-print-pdf

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---

### Trends in China’s Current Account
- China’s current account (CA) surplus has declined significantly from its peak in 2008; the decline over the past decade is largely structural, with part of the sharp decline in 2018 being cyclical.
- Drivers of the trend toward greater balance:
  - widening of the services deficit;
  - moderation of the surplus in goods trade;
  - declining goods trade surpluses with the US and the EU; and declining deficits with Japan, Korea and Taiwan, Province of China.
- Tourism and services:
  - Tourism balance swung from a small surplus of around 5bn USD in 2008 to a deficit of nearly 250bn USD in 2018.
  - Number of Chinese outbound visitors rose from 46mn in 2008 to 162mn in 2018.
  - Transport services and royalty payments for intellectual property use increased but remained much smaller contributors compared with tourism.
- Goods trade and manufacturing:
  - Imports of raw materials and commodities (e.g., oil and iron ore) have increased, while the surplus in manufacturing remains strong but has plateaued.
  - Real effective exchange rate (REER) appreciated for much of the period then stabilized since 2016; the relationship between REER and the goods balance is difficult to establish.
- Value added (VA) in exports:
  - Over 80 percent of value-added in total gross exports is due to China (OECD TiVA, 2015).
  - China’s share in VA increased between 2008 and 2015, particularly in high-tech sectors.
  - For the United States–China bilateral trade balance in 2015: VA trade balance was USD219 billion, 13 percent lower than the gross trade balance of USD251 billion.
  - Averaging available years 2005–2015, the VA trade balance is 19 percent lower than corresponding gross numbers.

### Structural drivers behind the decline in the CA surplus
- Normalization of the domestic saving rate:
  - The fall in the CA surplus primarily reflects normalization of the domestic saving rate, which surged to extraordinarily high levels between 2000 and 2008.
  - Since the peak, a weaker national saving rate—partly due to an ageing population—has decreased the savings-investment gap. Both savings and investment have declined, with savings declining faster.
  - China’s national saving rate remains much higher than the global average and other countries with similar income levels, leaving room for further declines.
  - High household savings arise from: demographic changes induced by the one-child policy; transformation of the social safety net and job security during the transition from planned to market economy; housing reforms; and rising income inequality.
  - Corporate and government savings are largely in line with global norms despite a widening augmented deficit since the global financial crisis.
- Investment dynamics:
  - Fixed assets investment (FAI) has been falling as rebalancing continues; real estate investment has declined from nearly two decades of above 20 percent growth.
  - Investment is expected to continue moderating given high vacancy ratios, declining working age population, and slowing migration to cities.
  - As investment growth moderates, Chinese imports for commodities should decline, but this could be offset by lower household savings and higher consumption imports.
  - Government liberalization measures—e.g., tariff cuts—are expected to encourage imports: government estimates show the average tariff ratio fell from 9.8 percent in 2017 to 7.5 percent after cuts in November 2018.
- Export market share and rebalancing:
  - China’s share of world exports rose from around 4 percent in 2001 to 13 percent in 2017; manufacturing exports rose from 5 to 17 percent.
  - China is now the largest goods exporter; its share of world exports declined in 2016 and 2017.
  - Exports are likely to grow at the pace of trading partner growth, while imports may outpace exports as consumption rises.
- Processing trade, commodity share, and volatility:
  - The share of processing trade has declined significantly; processing trade previously linked exports directly to imports, muting CA volatility.
  - The share of primary products (around half fuel and petroleum) has increased, which are more volatile and driven by global commodity price cycles.
  - The increase in outbound tourism will make the CA more sensitive to currency fluctuations.

### Cyclical factors and the 2018 decline
- 2018 CA outcome:
  - China’s CA surplus was 0.4 percent of GDP in 2018, down from 1.6 percent of GDP in 2017.
  - The 1.2 percentage point drop in the CA surplus was mostly due to a decline in the goods trade balance.
  - Imports increased by around 0.7 percent of GDP in 2018.
- Role of oil and integrated circuits in 2018 import rise:
  - Rise in imports was driven by increases in oil and integrated circuit prices.
  - Oil prices in 2018 spent much of the year in the range of US$70-85/bbl, up from US$55-65/bbl in 2017.
  - Price increases accounted for close to 80 percent of the increase in petroleum imports; petroleum imports rose by $80bn or around 50 percent from 2017.
  - Semiconductor prices surged after years of declines, pushing up integrated circuit imports by around $50bn compared with 2017; price increases accounted for around 60 percent of that increase.

### Summary of main findings
- Structural factors driving the CA surplus decline:
  - rebalancing;
  - increase in outbound tourism; and
  - moderation in goods surplus due to market saturation and growth differentials with trading partners.
- 2018 featured a pronounced cyclical component:
  - the 1.2 percent (percentage point) decline in 2018 was in part driven by cyclical factors, notably the price impact of oil and semiconductor prices on imports.

### Key findings on China’s current account evolution (0.4 and 0.2 percent of GDP)
- 0.4 and 0.2 percent of GDP respectively.
- Impact on CA likely to be smaller (due to higher export prices) and is estimated at around 0.4 percent of GDP.
- Since its peak in 2008, China’s current account surplus declined driven by:
  - increase in outbound tourism;
  - rebalancing from investment to consumption;
  - moderation in goods surplus due to market saturation and growth differentials with trading partners;
  - appreciation of the REER towards equilibrium.
- The 1.2 percent decline in 2018 (compared to 2017) was in part driven by cyclical factors related to oil and semiconductor prices.
- Despite sizeable foreign assets, China’s income account remains in deficit because less than 30 percent of China’s external assets consist of higher yielding risky assets (direct and equity portfolio investment), while 70 percent of external liabilities comprise riskier instruments (direct and portfolio equity investments).

### Role of domestic policies and internal imbalances
- Domestic policies have supported the current account surplus decline, but at the expense of internal imbalances.
- Changes relative to 2008 include:
  - structural fiscal balance (share of GDP) deteriorated by 4.5 percentage points;
  - private credit (share of GDP) expanded by 85 percentage points (contributing to a decline in net corporate saving);
  - reserves (share of GDP) declined by 10.3 percentage points.
- Such expansionary credit and fiscal policies contributed to the buildup of domestic leverage and vulnerabilities.
- Achieving a lasting external balance requires reining in expansionary macroeconomic policies while accelerating structural reforms to raise consumption and reduce overall saving.

### Medium-term baseline projections and scenarios
- Under the baseline of continued rebalancing, the current account is expected to remain close to balance, with the small current account surplus recorded in 2018 expected to turn into a small deficit in the medium term.
- Baseline assumptions:
  - Import demand increases as savings fall faster than investment – a rise in share of private consumption;
  - Export growth slows due to market saturation and continued higher growth in China relative to trading partners;
  - Benign outlook for commodity prices;
  - Tourism deficit increases in line with GDP;
  - No significant change in income account and the structure of assets;
  - Trade tensions do not escale markedly and tariffs remain at current (July 2019) levels.
- Risks and alternative outcomes:
  - Higher commodity prices (particularly oil) can materially shrink the goods surplus and lead to higher current account deficits.
  - Higher-than-projected growth (via domestic demand or credit) would increase imports and push up the current account deficit; higher Chinese growth would also tend to push up commodity prices.
  - Real appreciation beyond fundamentals, higher-than-projected IP payments, or pickup in tourism could increase the current account deficit.
  - Lower growth or a slowdown in rebalancing can lead to higher current account surpluses and a return of external imbalances; tax-cut-based stimulus is likely to have lower import intensity than public investment.

### External asset/liability composition and trends
- Share of direct investment abroad in total assets rose from less than 5 percent in 2007 to around 26 percent in 2018.
- China’s international assets: USD 7,324 bn; international liabilities: USD 5,194 bn; net international assets: 2,130 (all USD bn as presented).
- Reserve assets: 3,168 (43.3% of assets); direct investment abroad: 1,899 (25.9% of assets); equity portfolio investment: 270 (3.7% of assets).

### International impact and global perspective
- As a share of global GDP, China’s current account surplus peaked at 0.66 percent of global GDP in 2008, declined to 0.06 percent of global GDP in 2018, and is projected to reach about -0.01 percent of global GDP in 2024.
- Further declines in China’s current account surplus will reduce excess global imbalances, a positive development for global stability.
- China’s excess current account surplus was one of the highest contributors to global excess current account surplus, peaking at around 0.3 percent of global GDP in 2015.
- Country-level effects:
  - Some Asian economies (Taiwan Province of China, Singapore, Korea) benefited from China’s rising imports of computers, electronics, and electrical equipment.
  - Korea’s exports to China in electronics rose to 41 percent of total exports to China in 2017, up from 28 percent in 2008.
  - Japan’s trade balance with China deteriorated by around USD 33bn in 2008–2015 (equivalent to a decline of 0.7 percentage points of Japan’s GDP).
  - Germany’s trade balance with China improved markedly due to motor vehicles and machinery; vehicles rose to 24 percent of Germany’s exports to China in 2017 from 15 percent in 2008.
  - Commodity exporters (Brazil, Australia) witnessed higher trade balances with China.
  - For the U.S. and Canada, gross trade balance with China improved marginally as a share of GDP while the value-added trade balance deteriorated moderately.
- Potential exporters:
  - Advanced economies (U.S., New Zealand, Japan) have potential to increase exports to China in sectors with revealed comparative advantage (electronics; distributive trade, transport, accommodation, and food services), though strong imports from China may offset gains for some countries.

### Policy recommendations and financial sector implications
- Domestic policy priorities:
  - Continue and accelerate rebalancing to increase consumption demand.
  - Structural reforms: improve the social safety net; undertake state-owned enterprise reforms; open markets to the private sector and foreign firms.
  - Regulatory and supervisory reforms to address excess leverage and pursue “debt neutrality” with SOEs.
  - “Made in China” should focus on comparative advantage and not import substitution.
- External and financial sector priorities:
  - Deepen and accelerate opening up; support the international trading system.
  - Further reduction in import tariffs and increased trade openness.
  - Further opening up of the service sector and liberalization of restrictions to trade and investment.
  - Address structural issues such as intellectual property enforcement.
  - Prepare the financial system for greater volatility and larger capital inflows through continued de-risking and micro- and macro-prudential reforms.
  - Encourage higher quality, stable, and diversified inflows by further opening the capital account; transparency and regulatory reforms to adhere to international standards and encourage institutional and long-term investors; increase availability of internationally traded instruments; continued RMB internationalization; diversify external asset portfolio to generate higher returns.
  - Allow the currency to respond more to short-term moves and permit greater two-way flexibility of the exchange rate; develop the FX market, improve FX risk management, and modernize the monetary policy framework.

*Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019244-print-pdf.pdf*

### Section IV offers forward looking implications, Section V discusses the global implications, and

### wpiea2019244-print-pdf - Section IV offers forward looking implications, Section V discusses the global implications, and

### Trends in China’s Current Account
- China’s current account (CA) surplus has declined significantly from its peak in 2008; the decline over the past decade is largely structural, with part of the sharp decline in 2018 being cyclical.
- Drivers of the trend toward greater balance:
  - widening of the services deficit;
  - moderation of the surplus in goods trade;
  - declining goods trade surpluses with the US and the EU; and declining deficits with Japan, Korea and Taiwan, Province of China.
- Tourism and services:
  - Tourism balance swung from a small surplus of around 5bn USD in 2008 to a deficit of nearly 250bn USD in 2018.
  - Number of Chinese outbound visitors rose from 46mn in 2008 to 162mn in 2018.
  - Transport services and royalty payments for intellectual property use increased but remained much smaller contributors compared with tourism.
- Goods trade and manufacturing:
  - Imports of raw materials and commodities (e.g., oil and iron ore) have increased, while the surplus in manufacturing remains strong but has plateaued.
  - Real effective exchange rate (REER) appreciated for much of the period then stabilized since 2016; the relationship between REER and the goods balance is difficult to establish.
- Value added (VA) in exports:
  - Over 80 percent of value-added in total gross exports is due to China (OECD TiVA, 2015).
  - China’s share in VA increased between 2008 and 2015, particularly in high-tech sectors.
  - For the United States–China bilateral trade balance in 2015: VA trade balance was USD219 billion, 13 percent lower than the gross trade balance of USD251 billion.
  - Averaging available years 2005–2015, the VA trade balance is 19 percent lower than corresponding gross numbers.

### Structural drivers behind the decline in the CA surplus
- Normalization of the domestic saving rate:
  - The fall in the CA surplus primarily reflects normalization of the domestic saving rate, which surged to extraordinarily high levels between 2000 and 2008.
  - Since the peak, a weaker national saving rate—partly due to an ageing population—has decreased the savings-investment gap. Both savings and investment have declined, with savings declining faster.
  - China’s national saving rate remains much higher than the global average and other countries with similar income levels, leaving room for further declines.
  - High household savings arise from: demographic changes induced by the one-child policy; transformation of the social safety net and job security during the transition from planned to market economy; housing reforms; and rising income inequality.
  - Corporate and government savings are largely in line with global norms despite a widening augmented deficit since the global financial crisis.
- Investment dynamics:
  - Fixed assets investment (FAI) has been falling as rebalancing continues; real estate investment has declined from nearly two decades of above 20 percent growth.
  - Investment is expected to continue moderating given high vacancy ratios, declining working age population, and slowing migration to cities.
  - As investment growth moderates, Chinese imports for commodities should decline, but this could be offset by lower household savings and higher consumption imports.
  - Government liberalization measures—e.g., tariff cuts—are expected to encourage imports: government estimates show the average tariff ratio fell from 9.8 percent in 2017 to 7.5 percent after cuts in November 2018.
- Export market share and rebalancing:
  - China’s share of world exports rose from around 4 percent in 2001 to 13 percent in 2017; manufacturing exports rose from 5 to 17 percent.
  - China is now the largest goods exporter; its share of world exports declined in 2016 and 2017.
  - Exports are likely to grow at the pace of trading partner growth, while imports may outpace exports as consumption rises.
- Processing trade, commodity share, and volatility:
  - The share of processing trade has declined significantly; processing trade previously linked exports directly to imports, muting CA volatility.
  - The share of primary products (around half fuel and petroleum) has increased, which are more volatile and driven by global commodity price cycles.
  - The increase in outbound tourism will make the CA more sensitive to currency fluctuations.

### Cyclical factors and the 2018 decline
- 2018 CA outcome:
  - China’s CA surplus was 0.4 percent of GDP in 2018, down from 1.6 percent of GDP in 2017.
  - The 1.2 percentage point drop in the CA surplus was mostly due to a decline in the goods trade balance.
  - Imports increased by around 0.7 percent of GDP in 2018.
- Role of oil and integrated circuits in 2018 import rise:
  - Rise in imports was driven by increases in oil and integrated circuit prices.
  - Oil prices in 2018 spent much of the year in the range of US$70-85/bbl, up from US$55-65/bbl in 2017.
  - Price increases accounted for close to 80 percent of the increase in petroleum imports; petroleum imports rose by $80bn or around 50 percent from 2017.
  - Semiconductor prices surged after years of declines, pushing up integrated circuit imports by around $50bn compared with 2017; price increases accounted for around 60 percent of that increase.

### Summary of main findings
- Structural factors driving the CA surplus decline:
  - rebalancing;
  - increase in outbound tourism; and
  - moderation in goods surplus due to market saturation and growth differentials with trading partners.
- 2018 featured a pronounced cyclical component:
  - the 1.2 percent (percentage point) decline in 2018 was in part driven by cyclical factors, notably the price impact of oil and semiconductor prices on imports.

*Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019244-print-pdf.pdf*

### 0.4 and 0.2 percent of GDP

### wpiea2019244-print-pdf - 0.4 and 0.2 percent of GDP

### Key findings on China’s current account evolution
- 0.4 and 0.2 percent of GDP respectively.
- Impact on CA likely to be smaller (due to higher export prices) and is estimated at around 0.4 percent of GDP.
- Since its peak in 2008, China’s current account surplus declined driven by:
  - increase in outbound tourism;
  - rebalancing from investment to consumption;
  - moderation in goods surplus due to market saturation and growth differentials with trading partners;
  - appreciation of the REER towards equilibrium.
- The 1.2 percent decline in 2018 (compared to 2017) was in part driven by cyclical factors related to oil and semiconductor prices.
- Despite sizeable foreign assets, China’s income account remains in deficit because less than 30 percent of China’s external assets consist of higher yielding risky assets (direct and equity portfolio investment), while 70 percent of external liabilities comprise riskier instruments (direct and portfolio equity investments).

### Role of domestic policies and internal imbalances
- Domestic policies have supported the current account surplus decline, but at the expense of internal imbalances.
- Changes relative to 2008 include:
  - structural fiscal balance (share of GDP) deteriorated by 4.5 percentage points;
  - private credit (share of GDP) expanded by 85 percentage points (contributing to a decline in net corporate saving);
  - reserves (share of GDP) declined by 10.3 percentage points.
- Such expansionary credit and fiscal policies contributed to the buildup of domestic leverage and vulnerabilities.
- Achieving a lasting external balance requires reining in expansionary macroeconomic policies while accelerating structural reforms to raise consumption and reduce overall saving.

### Medium-term baseline projections and scenarios
- Under the baseline of continued rebalancing, the current account is expected to remain close to balance, with the small current account surplus recorded in 2018 expected to turn into a small deficit in the medium term.
- Baseline assumptions:
  - Import demand increases as savings fall faster than investment – a rise in share of private consumption;
  - Export growth slows due to market saturation and continued higher growth in China relative to trading partners;
  - Benign outlook for commodity prices;
  - Tourism deficit increases in line with GDP;
  - No significant change in income account and the structure of assets;
  - Trade tensions do not escale markedly and tariffs remain at current (July 2019) levels.
- Risks and alternative outcomes:
  - Higher commodity prices (particularly oil) can materially shrink the goods surplus and lead to higher current account deficits.
  - Higher-than-projected growth (via domestic demand or credit) would increase imports and push up the current account deficit; higher Chinese growth would also tend to push up commodity prices.
  - Real appreciation beyond fundamentals, higher-than-projected IP payments, or pickup in tourism could increase the current account deficit.
  - Lower growth or a slowdown in rebalancing can lead to higher current account surpluses and a return of external imbalances; tax-cut-based stimulus is likely to have lower import intensity than public investment.

### External asset/liability composition and trends
- Share of direct investment abroad in total assets rose from less than 5 percent in 2007 to around 26 percent in 2018.
- China’s international assets: USD 7,324 bn; international liabilities: USD 5,194 bn; net international assets: 2,130 (all USD bn as presented).
- Reserve assets: 3,168 (43.3% of assets); direct investment abroad: 1,899 (25.9% of assets); equity portfolio investment: 270 (3.7% of assets). (Values preserved exactly as presented.)

### International impact and global perspective
- As a share of global GDP, China’s current account surplus peaked at 0.66 percent of global GDP in 2008, declined to 0.06 percent of global GDP in 2018, and is projected to reach about -0.01 percent of global GDP in 2024.
- Further declines in China’s current account surplus will reduce excess global imbalances, a positive development for global stability.
- China’s excess current account surplus was one of the highest contributors to global excess current account surplus, peaking at around 0.3 percent of global GDP in 2015.
- Country-level effects:
  - Some Asian economies (Taiwan Province of China, Singapore, Korea) benefited from China’s rising imports of computers, electronics, and electrical equipment.
  - Korea’s exports to China in electronics rose to 41 percent of total exports to China in 2017, up from 28 percent in 2008.
  - Japan’s trade balance with China deteriorated by around USD 33bn in 2008–2015 (equivalent to a decline of 0.7 percentage points of Japan’s GDP).
  - Germany’s trade balance with China improved markedly due to motor vehicles and machinery; vehicles rose to 24 percent of Germany’s exports to China in 2017 from 15 percent in 2008.
  - Commodity exporters (Brazil, Australia) witnessed higher trade balances with China.
  - For the U.S. and Canada, gross trade balance with China improved marginally as a share of GDP while the value-added trade balance deteriorated moderately.
- Potential exporters:
  - Advanced economies (U.S., New Zealand, Japan) have potential to increase exports to China in sectors with revealed comparative advantage (electronics; distributive trade, transport, accommodation, and food services), though strong imports from China may offset gains for some countries.

### Policy recommendations and financial sector implications
- Domestic policy priorities:
  - Continue and accelerate rebalancing to increase consumption demand.
  - Structural reforms: improve the social safety net; undertake state-owned enterprise reforms; open markets to the private sector and foreign firms.
  - Regulatory and supervisory reforms to address excess leverage and pursue “debt neutrality” with SOEs.
  - “Made in China” should focus on comparative advantage and not import substitution.
- External and financial sector priorities:
  - Deepen and accelerate opening up; support the international trading system.
  - Further reduction in import tariffs and increased trade openness.
  - Further opening up of the service sector and liberalization of restrictions to trade and investment.
  - Address structural issues such as intellectual property enforcement.
  - Prepare the financial system for greater volatility and larger capital inflows through continued de-risking and micro- and macro-prudential reforms.
  - Encourage higher quality, stable, and diversified inflows by further opening the capital account; transparency and regulatory reforms to adhere to international standards and encourage institutional and long-term investors; increase availability of internationally traded instruments; continued RMB internationalization; diversify external asset portfolio to generate higher returns.
  - Allow the currency to respond more to short-term moves and permit greater two-way flexibility of the exchange rate; develop the FX market, improve FX risk management, and modernize the monetary policy framework.

*Source: IMF working paper content (wpiea2019244-print-pdf).*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019244-print-pdf.pdf_