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China’s Narrowing Current Account Surplus: Evolving Trends and Policy Implications

Sarah Chan

Economic Alternatives, 2019, issue 3, 345-359

Abstract: The current account surplus that China has enjoyed for two decades has shown signs of narrowing. In the first quarter of 2018, China ran its first quarterly current account deficit after its accession to the World Trade Organisation in 2001. Although the current account turned from deficit to surplus in the later quarters of 2018, the period of consistent current account surplus has probably come to an end. China’s once significant goods trade surplus is expected to narrow steadily while the services trade deficit is set to widen further. Consequently, the current account balance is expected to lower in coming years, indeed even frequently entering negative territory. A narrowing current account surplus or current account deficit has important macroeconomic and policy implications. It is likely to exert pressure on the domestic currency and precipitate capital outflows, forcing the central bank to sell or drain foreign exchange reserves if the exchange rate is not flexible or remains tightly manage. Given that China’s current account surplus is now unsustainable, the government may have to introduce more flexibility to the Renminbi, since a flexible exchange rate acts as an automatic stabiliser to counter domestic and external shocks. It should also consider liberalising the services industries so as to enhance the competitiveness of the service sectors and improve the service trade deficit.

Keywords: Services; exchange rate; Current Account; China (search for similar items in EconPapers)
JEL-codes: F21 F31 F32 F41 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:nwe:eajour:y:2019:i:3:p:345-359