China’s current-account surplus was once a hot topic in economic circles, stirring up quite the debate. At its peak in 2007, the surplus made up nearly 10% of China’s GDP. This surplus essentially measures the difference between China’s income and its spending, driven mainly by its trade surplus and the income it receives from foreign assets. For almost two decades, China’s surpluses have garnered criticism, accused of stealing jobs by unfairly boosting its exports. Now, some worry that a similar shock may occur if the country’s electric vehicles output grows too quickly.
However, China’s current-account surplus has dwindled to a modest $312 billion or 1.5% of GDP over the past year, according to the State Administration of Foreign Exchange (SAFE). This is below the 3% threshold considered excessive by America’s Treasury.
But, is this figure trustworthy? Some analysts, such as Brad Setser of the Council on Foreign Relations and financial commentator Matthew Klein, believe that the official numbers are vastly underestimated. In Mr. Klein’s opinion, China’s true surplus is now “about as large as it has ever been, relative to the size of the world economy”. Their main arguments suggest that China may be undervaluing income from its foreign assets and exports.
According to SAFE, the income that China generates from its foreign assets has plunged from mid-2021 to mid-2022, a rather peculiar trend given rising global interest rates. Mr. Setser’s alternative estimate, based on assumptions about China’s assets, would add around $200 billion to the surplus.
Additionally, China’s goods surplus appears smaller in SAFE’s figures than in China’s own customs data, with a gap of $230 billion over the past year. It’s a significant amount, as Mr. Setser points out.
China could see a bigger surplus as a positive, but it also has some unsettling implications. The question remains: “What is happening to the additional dollars China is earning?” Since these funds are not showing up on the books of China’s central bank or its state-owned banks, there must be a hidden capital outflow offsetting them. Typically, such outflows end up in a residual category of the ledger. Mr. Setser believes this residual should be around 2% of GDP, rather than the official figure of near zero.
Now, for a different perspective, SAFE attributes the export gap to China’s free-trade zones and similar enclaves. These are located inside China’s territory but outside its official tariff border, and goods leaving these enclaves for the rest of the world are counted as exports by customs but not by SAFE. This could explain the growing gap over the past two years, as pointed out by Adam Wolfe of Absolute Strategy Research.
However, Mr. Setser isn’t entirely convinced. He argues that if China’s free-trade zones have experienced a dramatic export boom, it should create ripples elsewhere. For instance, increased remittances should reflect the rise in wages earned by workers. But the reality is that wages have only increased slightly.
Even if the official current-account surplus is accurately calculated, it might offer little comfort to China’s trading partners. If the country’s domestic demand remains weak, goods made in its free-trade zones might flood foreign markets, counting as Chinese imports by the rest of the world even though SAFE doesn’t count them as Chinese exports.
It’s definitely a complex and intriguing issue that sparks a lot of debate, and it’ll be interesting to see how it all unfolds.
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