The Art of Balance

IMF Blog, May 30, 2012

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Author: Anoop Singh
Date: May 30, 2012
Topic: Recent decline in China’s current account surplus and whether it reflects sustained economic rebalancing from export-led to consumption-led growth.

China’s current account surplus fell to around 2.8 percent of gross domestic product in 2011, from a pre-crisis peak of more than 10 percent in 2007.
IMF economists estimate forces other than rising consumption account for close to two-thirds of the decline in the current account surplus since 2007.
In the World Economic Outlook referenced, IMF economists expected China’s current account surplus to rise again to around 4-4½ percent by 2017, with significant uncertainty about structural change.

Cyclical forces since 2008 (global financial crisis) damaged growth and demand and affected China’s export sector.
Example statistic: exports of machinery and equipment to the United States contributed 10-15 percent of China’s overall export growth in the early 200s; this figure is now around 5 percent.
China’s infrastructure-driven stimulus led to higher demand for imported minerals and energy, funded by massive injections of new credit.

Strong Chinese demand for commodities and minerals contributed to rising global prices for these products while prices for China’s exports of machinery and equipment fell, reinforcing a deterioration in China’s terms of trade.
Worsening terms of trade, together with persistently strong imports tied to investment spending, substantially reduced the trade surplus.

There is little evidence that consumption is rising as a share of GDP, so the observed decline in the current account surplus may not yet be consumption-driven.
China’s 12th Five Year Plan is focused on raising household income, boosting consumption, and expanding the service sector.
If proposed structural reforms catalyze consumer spending successfully, China could achieve an unambiguously consumption-driven decline in its external imbalance.

China’s demand for investment goods has risen more sharply than its demand for consumer goods, generally by a ratio of 2 to 1.
For Japan and Korea, China accounts for 20-25 percent of their total capital goods exports, a fourfold increase from a decade earlier.
China accounts for 2 percent of global consumer goods imports, indicating its role as an importer of consumer goods remains small.
Chinese consumers have increasingly turned to domestically produced goods; China’s share in global consumer goods imports has fallen behind its share in global consumption.
China accounts for more than 50 percent of all intraregional intermediate goods imports, twice its share in the mid 1990s, making it the center of Asia’s supply chain.
Greater vertical integration means Asian economies’ exports to China are increasingly driven by the success of China’s exports in world markets.
If Chinese export growth slows, Asian trading partners would face significant headwinds, amplified if China on-shores a larger share of the regional supply chain.

The reduction in China’s current account surplus to date appears driven mainly by cyclical forces, worsening terms of trade, and investment-related import demand, rather than a clear, sustained shift toward consumption.
A durable, consumption-driven rebalancing would require successful implementation of structural reforms to raise household income and expand services as outlined in the 12th Five Year Plan.
Net benefits for Asian trading partners from China’s rebalancing would be larger and more lasting if they increase direct and indirect access to Chinese consumers.

The Art of Balance — Anoop Singh, May 30, 2012