Vanishing of China's Twin Surpluses and Its Policy Implications

Ming Zhang () and Xiaofen Tan

China & World Economy, 2015, vol. 23, issue 1, 101-120

Abstract: This paper argues that the twin surpluses in China's balance of payments will disappear in the future as a result of external and internal structural changes. China's current account surplus will diminish as a result of the decline in the goods trade surplus, the expanding service trade deficit and negative investment income. China's capital account might shift from surplus to deficit as a result of shrinking net direct investment inflows and more volatile short-term capital flows. When the twin surpluses no longer exist, the normalization of the US treasury bond yields will be sped up, terminating the one-way appreciation of the RMB exchange rate; the People's Bank of China's pressure to sterilize inflows will be alleviated, and new problems for the People's Bank of China's monetary operation will emerge; new financial vulnerabilities for the Chinese economy will arise. Finally, the present paper provides some policy suggestions for the Chinese Government to deal with the declining twin surpluses.

Date: 2015
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