How the China current account surplus impact the world Essay Sample

According to the Economist, China’s Current Account surplus has fallen. This is a result of cyclical and structural forces, trade wars, the migration of citizens, an aging community and excess consumption. A rapid increase in consumption is one of the most significant factors that affect China’s economy. China’s economy increased their consumption, and China’s GNP and living standards improved in recent ten years, which led to a decrease in domestic saving. Evidently, an increase in consumption, in addition to, a decrease in domestic saving will cause a current account deficit.  At the same time, as China’s economy improved, more and more Chinese families can afford to abroad tourism and studying, leading to an increasing abroad consumption. Furthermore, according to the article China’s Coming Current Account Deficit, Setser indicates import change decreases China’s current account surplus, not only the oil price fluctuation but also the method of measurement about import impact current account. claims that the ageing problem in China starts affecting national saving, and impact the current account in addition.

China’s Current Account Surplus

China’s current account surplus will steadily decrease, fluctuating as it comes to terms with the that ultimately, China’s current account will find itself in a deficit. These issues cannot be solved within a short period of time, and a higher percentage of China’s population are ageing. Buiter (1981), states that a faster ageing country behaves as if its “representative agent” was relatively more impatient, which in turn indicates that such country will experience a larger decline in private savings. The economy cannot reduce their consumption, so will indefinitely see a deficit.

Control of the flow of foreign capital

China has universally established control of the flow of foreign capital. They have recently eased the quotas to improve the economy by increasing the opportunity to widen their current account surplus. This is a rational choice for China, because they hold control over foreign investors that feel inclined to invest in the Chinese economy due to the attractiveness of China’s market, regardless of the risks involved. As China is reducing control of both capital inflow and outflow, Chinese currency will flow to the international market, causing Chinese currency depreciation. Furthermore, domestic public will keep abroad consumption, and it reduces the current account more. ‘If a liberalized financial account results in more outflows than inflows (as seems likely given that controls on outflows are now tighter than controls on inflows), China’s currency would depreciate and that would push China’s current account back into a substantial surplus.’ Essentially, changing the exchange rate will increase China’s current account surplus.

When the surplus reduces or decreases into deficits, this indicates China’s economy is importing more than it is exporting. In other words, it stimulates other countries’ economies, the worldwide economy might rise up. However, China will adjust their international trade policy to rebalance their current account to expectation conditions, and it might not satisfy other countries’ expectations. So the world economy, in my opinion, will also arrive at a new balance.

Reference:

Setser, Brad w., China’s Coming Current Account Deficit, Council Foreign Relations.

Fougere, M. & Merette, M. (1998) Population Ageing and the Current Account in Selected OECD Countries

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