The decline in China’s exports
Container-shipping costs, a proxy for demand of Chinese exports, have fallen as a result of weaker demand from the U.S. and Europe. Such a decline in net exports, argues Michael Pettis, must be balanced either by a rise in investment, a decline in savings, or some combination of the two. What these options entail?
- A drop in net exports is matched with a decline in savings through rising unemployment, so the gap between savings and investment declines in line with the decline in net exports.
- The government can increase its level of investment by, for example, building more infrastructure or encouraging property developers to increase investment by building more buildings. The increase in investment isn’t sustainable in this case because it is backed by an unsustainable increase in the country’s debt burden.
- A contraction in exports could be balanced out with a rise in debt, although in this case it would be household debt rather than corporate or government debt.
- The only sustainable way for China to compensate for the drop in export growth is by transferring money from low-consuming sectors of the economy to ordinary households i.e. transferring wealth and income from local governments to households. This could lead consumption to surge because of a surge in household income.
But one way or another, if export growth slows enough to cause a substantial contraction in China’s trade surplus, Beijing will most likely have to respond either with a further increase in infrastructure investment (and in the country’s debt burden) or it will have to allow unemployment to rise.
How China Would Respond to Lower Exports
By: Michael Pettis – Peking University
China’s demographics and its current account surplus
China’s current account surplus peaked at 10 percent of GDP in 2007. It then began a precipitous decline, falling to below 1 percent of GDP by 2018. But the pandemic disrupted this trend and lead the current account surplus to swell to nearly 2 percent of GDP.
In this commentary, Clark et al. examine the role of demographics on China’s current account balance. They find that:
- China’s demographic profile is undergoing profound change, with population aging occurring at a pace never before seen for a country at its income level.
They use historical data and projections of China’s population age distribution to understand how this demographic pressure has influenced its current account balance (CAB) in the past, and how the CAB may evolve in coming decades.
Finally, demographic pressure hit a downward inflection point just before the pandemic. The downward weight on China’s external balance is projected to grow steadily more heavy over the next two decades. In fact, holding other influences constant and starting from its pre-pandemic level, changes in age structure could be enough to drag China’s CAB into deficit only a few years from now.
What Is the Outlook for China’s External Surplus?
By: Hunter L. Clark, Matthew Higgins – Federal Reserve Bank of New York
