China surplus: Global rebalancing may be over already

China on Friday gave evidence that it was contributing to a faint stirring of global economic rebalancing, but economists say it may be over even before it began!

China’s current account surplus declined 35% in 2009 to $284 billion, according to preliminary data from the State Administration of Foreign Exchange. The country also recorded a $249 billion merchandise trade surplus and a $29 billion services trade deficit.

And in the capital and financial account, China saw a $109 billion inflow, of which $36.5 billion was from direct investment. Offsetting the current and capital accounts was an equivalent increase ($393 billion) in reserve assets, of which $382 billion was in foreign exchange and $11 billion was in special depository receipts.

“A declining current account surplus in China and a decline in the US current account deficit over much of 2009 represented a reduction in imbalances that characterised the global economy in past years,” notes Moody’s Economy.com associate economist Alaistair Chan.

But it may already be over, Chan adds. “Some form of unbalancing could reoccur this year. China’s trade surplus gradually trended up throughout 2009 and is expected to continue doing so, and US current account and foreign trade deficits are widening out again.”
One way to avoid another imbalance would be a one-off revaluation of the yuan, reasons Chan.

“This would make US exports competitive while boosting Chinese consumption, by lowering the cost of imports into China and raising real incomes. It would also head off speculative inflows that would arise if the yuan was appreciated on a gradual basis.”

But other economists see no immediate prospect of a yuan appreciation against the US dollar. “Despite the strong push by US President Barack Obama, Beijing is unlikely to allow its currency to appreciate over the next three months,” says Credit Suisse economist Dong Tao.

“In our view, movement in the renminbi exchange is ultimately a political decision, and Chinese leaders will want to avoid being seen domestically as bowing to foreign pressure.”

Further, recent global economic developments may have made Chinese leaders more concerned about the prospects for a global recovery and China’s export sector, says Tao.

"We believe renminbi appreciation will only take place when Beijing leaders feel more comfortable with the domestic labour market.” In any case, he reasons, China can point to the rising US dollar and claim that the renminbi —- which is pegged to the dollar —- has appreciated against the currency basket.

More fundamentally, says Tao, “We think the Chinese government has decided to narrow the current account surplus by raising wages rather than by letting the renminbi appreciate… This strategy should boost China’s consumption and GEP, and accelerate the transition to domestic demand-driven growth, although it could be negative for inflation.”

In any case, in his estimation, an appreciation of the renminbi “would not have much of an impact” on the US trade imbalance. “In our view, this is caused by overconsumption and a shrinking manufacturing base (in the US). As Americans save more, the current account should improve.” However, unless the US rebuilds its manufacturing base, China’s loss would not be the US’ gain, adds Tao. The benefits from an appreciation in the renminbi would instead go to other countries such as Mexico and Malaysia, “possibly associated with some inflationary pressure on US consumers.”