China’s Rebalancing Act

BEIJING – China’s 12th Five-Year Plan calls for a shift in the country’s economic model from export-led growth toward greater reliance on domestic demand, particularly household consumption. Since the Plan’s introduction, China’s current-account surplus as a share of GDP has indeed fallen. But does that mean that China’s adjustment is on track?

, the fall in China’s current-account surplus/GDP ratio has largely been the result of very high levels of investment, a weak global environment, and an increase in prices for commodity imports that has outpaced the rise in prices for Chinese manufactured goods. So the fall in China’s external surplus/GDP ratio does not represent economic rebalancing; on the contrary, the Fund predicts that the ratio will rebound in 2013 and approach its pre-crisis level thereafter.

The IMF’s explanation of the recent fall in China’s current-account surplus/GDP ratio is broadly correct. Experience suggests that China’s external position is highly sensitive to global conditions, with the surplus/GDP ratio rising during boom times for the world economy and falling during slumps. Europe’s malaise has hit China’s exports badly, and undoubtedly is the most important factor underlying the current decline in the ratio.

By definition, without a change in the saving gap, there will be no change in the trade surplus, and vice versa. Furthermore, the saving gap and the trade balance interact with each other constantly, making them always equal. In response to the global financial crisis in 2008, China introduced a RMB4 trillion ($634 billion) stimulus package. While the increase in investment reduced the saving/GDP ratio, the resulting increase in imports lowered the trade surplus/GDP ratio. As a result, China’s external surplus/GDP ratio fell significantly in 2009.

In 2010, China’s government adjusted its economic policy. In order to control inflation and real-estate bubbles, the central bank tightened monetary policy and the government refrained from another round of fiscal stimulus. China’s real-estate investment accounted for 10% of GDP, and slower investment growth in the sector necessarily reduces import demand, directly and indirectly. But, because the fall in import growth had yet to turn into a rout, while China’s exports to Europe plummeted, China’s current-account surplus fell further in GDP terms in 2011.

This situation is likely to change in 2012. The negative impact of the fall in real-estate investment since 2010 has been deeper and longer than expected; indeed, almost all categories of imports that fell by 10% or more in August were related to real-estate investment. As a result, it is possible that the fall in investment growth will reverse the declining external surplus/GDP ratio in 2012, unless the global economy deteriorates further and/or the Chinese government launches a new stimulus package.

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