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Imagine when China runs a trade deficit

September 29, 2009

If current trends continue, China might swing to a trade deficit
in the not-too-distant future. Given that China has enjoyed more
than a decade of strong exports, this may sound a bit far-fetched.
But even if it happens, this would not necessarily be something for
the world to worry about.

Some economists have recently sounded alarm bells about the
possibility of a Chinese trade deficit. They argue that if the
Chinese current account surplus shrinks, it would leave Beijing
with less spare cash to buy U.S. Treasury bonds. Then who would
fund the U.S. budget deficit — and, by implication, U.S.
consumers?

Those worries are largely misplaced. First, it is unlikely
to happen any time soon. In order for China to have a trade
deficit next year, imports would have to outgrow — or shrink
less than — exports by at least 23 percentage points.

In August, exports fell 23.4 percent while imports fell 17
percent. So while the trade surplus is diminishing, a deficit is
not around the corner.

If China’s trade surplus shrinks, it will most likely be
caused by a contracting U.S. deficit, in which case Americans
will be saving more and the U.S. will be less dependent on
overseas investors to finance its government debt. That would be
a sign that the long-overdue rebalancing of the global economy
was beginning to take place.

It would not be so bad for the Chinese economy either,
because China is a lot less dependent on exports than many
people assume. Although exports have accounted for a whopping 50
percent of the economy in the past few years, the contribution
of net exports to economic growth is actually much smaller,
because a lot of what China sells abroad is low value-added
assembly work.

In the same way, one cannot just look at China’s large
imports number and jump to the conclusion that China is a big
end-user of the world’s goods. China’s imports accounted for a
third of its gross domestic product last year, versus about 17
percent in the U.S. during the same period. But this is because
a lot of what China imports, such as computer parts, eventually
finds its way abroad.

On average, net exports contributed 1.4 percentage points to
annual GDP growth between 1979 and 2007, according to the
Statistics Bureau, much less than the contribution from the
other two drivers — consumption and investment.

The transition to a more balanced trade account will take
time. In particular, it will need a push from foreign exchange
reforms, as the currently undervalued yuan encourages exports
and discourages imports. China allowed the yuan to rise
gradually for a few years after 2005, but has re-pegged it to
the dollar since the start of the credit crisis.

It will take time before Beijing is confident enough to
remove some of the export incentives, or at least not pile them
up as it has done in response to the crisis. A more equalised
trade account will probably not hurt China’s overall growth that
much, but will help in making the world economy more balanced.

Comments

I was unable to make head or tail out of heading for the post. Material inside post says exports = imports more or less balanced because exports are directly linked to imports and therefore contraction in demand in world economies will have no impact on China’s domestic demand. If that be the case then the topic should have been no effect due to fall in foreign trade of China?

Posted by Rohit | Report as abusive
 

Its not easy to say that China would face some trade deficit. As long as I am concerned I have examined that China always continues to change its priorities, power of motivation and it creates its name in every field whether its electronic, Apparel, Scientific or any.

 

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