Barrie Maguire

The End of China’s Surplus

The policies that China will adopt as part of its new five-year plan will shrink its trade and current-account surpluses, possibly moving them into deficit. This is exactly the outcome that US officials want, but they should be careful what they wish for.

CAMBRIDGE – China’s current-account surplus – the combination of its trade surplus and its net income from foreign investments – is the largest in the world. With a trade surplus of $190 billion and the income from its nearly $3 trillion portfolio of foreign assets, China’s external surplus stands at $316 billion, or 6.1% of annual GDP.

Because the current-account surplus is denominated in foreign currencies, China must use these funds to invest abroad, primarily by purchasing government bonds issued by the United States and European countries. As a result, interest rates in those countries are lower than they would otherwise be.

That may all be about to change. The policies that China will adopt as part of its new five-year plan will shrink its trade and current-account surpluses. It is possible that, before the end of the decade, China’s current-account surplus will move into deficit, as the country imports more than it exports and spends its foreign-investment income on imports rather than on foreign securities. If that happens, China will no longer be a net buyer of US and other foreign bonds, putting upward pressure on interest rates in those countries.

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