A Change in Focus

AuthorMalhar Nabar and Olaf Unteroberdoerster
Positionan Economist and is a Deputy Division Chief, both in the IMF's Asia and Pacific Department.

For the past five years, the global economic news has often featured declining numbers: asset prices, down; employment, down; industrial production, down. Add to this list China’s external surplus. The world’s second-largest economy has seen a key measure of its surplus with trading partners—the current

account balance, which nets payments to foreigners

and income from abroad—drop from $412 billion, or 9.1 percent of GDP, in 2008 to $202 billion, 2.8 percent of GDP, in 2011 (see Chart 1).

Falling numbers generally reflect troubled economic times. But could the decline in China’s external surplus instead be welcome news and a sign that its economy is rebalancing—away from exports toward stable, domestically driven growth? If that is the case, then the rest of the Asian economies will have to adjust because they have become so closely linked to China.

Declining surplus

The sharp compression in China’s external surplus undoubtedly reflects weak demand in its largest export destinations. Most people think of clothes, footwear, and toys from China feeding the U.S. consumer frenzy during the boom years prior to 2007. But Chinese exporters had made much broader inroads into the U.S. market beyond Wal-Mart and Target. Exports of machinery and equipment to the United States contributed 10 to 15 percent of China’s overall export growth in the early 2000s. That contribution has declined to about 5 percent during the postcrisis period because U.S. private investment, particularly in the housing market, has been subdued. At the same time, China’s imports of minerals and commodities have risen significantly since the crisis, in part due to increases in spending the government undertook to shore up domestic activity.

But beyond these cyclical forces, there are deeper elements at work.

First, China’s dramatic policy response to the global financial crisis—centered on infrastructure such as highways, high-speed rail, and improvements to ease travel between the inland provinces and the coast—contributed to a steep increase in the level of investment. As a percentage of GDP, investment spending in China rose from 41 percent before the crisis to 48 percent by 2009. Once the stimulus program started to wane and infrastructure spending began to slow, strong private sector manufacturing activity and construction of social housing ensured that investment remained close to 50 percent of GDP in 2011.

Second, China’s terms of trade (the average price of its exports relative to imports) have worsened in recent years, starting well before the global financial crisis (see Chart 2). As China has developed, its imports have shifted toward minerals, whose prices have been rising, while its exports have moved toward machinery, where competition has kept prices in check. Other export-oriented economies, notably Japan and Korea, experienced similar declines in their terms of trade as they developed. In China’s case, the sheer size of its trade flows implies that its external surplus has been highly sensitive to shifts in the prices of its exports and imports. And since 2009, the sustained strength in demand for imported commodities and minerals associated with China’s investment boom has reinforced this underlying dynamic of worsening terms of trade.

Third, reflecting in part the underlying shifts in the...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT