Tuesday, February 5, 2008

Current Account Surplus in China

Why Has China such a large current account surplus? China's current accounts surplus is nearly 11% of GDP or $250bn. This surplus is entirely due to its trade surplus of $261. Current account is composed of trade in goods (Trade balance) and trade in services.

The size of the Chinese current account surplus is really quite staggering; I'm not sure if it is a record, but I wouldn't be surprised if it was. These are the reasons for the current account surplus.

Reasons for Current Account Surplus

1. Undervalued Yuan.

It is argued by many, that the Chinese Yuan is undervalued making Chinese exports relatively more competitive and imports cheaper. This is a significant factor in making the terms of trade favour a surplus. The reason the Yuan has been kept undervalued is that the Chinese government are keen to promote exports as much as possible. They feel strong growth in the export sector is vital to creating employment and soaking up unemployment created through privatisation and decline of agriculture.
Nevertheless, the Chinese Yuan has appreciated 20% in the past 2 years, as the Chinese government slowly allow the Yuan to appreciate.

2. Comparative advantage in manufacturing exports.

China has been able to grow at a fast rate because it has been able to keep exports comparatively cheaper than elsewhere in the world. China's elastic supply of labour have enabled wage rates to remain low, giving China an advantage in the producing goods at a low cost.

3. High Domestic Savings Rate.

Despite the high rates of Chinese growth. The Chinese economy has a very high savings rate. 40% This means consumers are saving rather than spending on foreign imports. Rather than buy consumer goods, the Chinese are preferring to invest in foreign securities. e.g. buying US securities and bonds. This outflow of Capital has financed the US current account deficit; in the process China has built up an impressive amount of external assets.

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Anonymous said...

There is only one reason why China continues to run such a huge current account deficit. That's because the Renminbi is not fully convertible. In theory, China's current account is "open". However, in practice, it's quite difficult for ordinary Chinese (people and businesses) to obtain hard currency to purchase imports. If all of China were free to convert RMB and buy US exports, you'd see the current account fall dramatically.

Anonymous said...

The anonymous above me is an idiot.

The Chinese are stupid too.

They hold $2 trillion dollars of U.S. treasuries, which is volatile and its value is calculated based on yield and when the yield on other investments go up such as an increase in Interest rates means bond prices will drop accordingly so the returns (assuming equal risk) are the same.

Rather then invest that money by building roads, buying capital, and importing America's top talent, they have been giving America goods for free, and converting the useless paper (dollars) into useless Government Bonds.

China is acting like a tributary to America.