Photographer: Qilai Shen/Bloomberg

China's Great Economic Shift Brings Little to Global Rebalancing

  • China is set to post a record goods trade surplus this year
  • The trade surplus as a percentage of global GDP is rising too

China’s great rebalancing -- the long-sought shift away from investment and manufacturing towards consumption and services -- is one of the nation’s big themes of the year. One problem: the rebalancing stops at the water’s edge.

China’s trade imbalance with the rest of the world is rising, with the nation’s current-account surplus swelling as a share of the global economy. Much of that has been driven by a rising merchandise trade excess -- which is set for a record this year -- thanks to sliding imports due in part to commodity-price declines that have walloped natural-resource providers.

More broadly, the services industry offers fewer opportunities for foreign countries, aside from the boom in Chinese tourists. That leaves the world’s second-largest economy providing less of a spark for global growth than its continued expansion of around 7 percent would have suggested.

"China in 2015 presents two challenges to its trade partners," said Bloomberg Intelligence economist Tom Orlik. "First, growth has slowed and with it demand for everything from iron ore to luxury handbags. Second, China’s trade surplus, which represents demand borrowed from the rest of the world, has hit a record."

China’s current account surplus as a proportion of gross domestic product is forecast to swell to 2.7 percent this year, from 2.1 percent last year, and hold at 2.5 percent in 2016 and 2017, according to economists surveyed by Bloomberg.

To be sure, both the merchandise trade surplus and the current account surplus relative to GDP have come down from the mid-2000s. But because China’s economy is so much bigger now, the goods trade surplus relative to a more stagnant global economy is back near pre-crisis levels.

With the U.S., the merchandise trade position is as unbalanced as ever. The Trans-Pacific Partnership, a trade agreement that currently excludes China, marks part of the U.S. response. The trade advantage with the U.S. also risks fanning tensions as the U.S. heads toward an election year, where jockeying candidates often seek advantage by pledging to put American jobs first and promising a hard line against global competitors.

China’s shift away from reliance on heavy industries is being reflected in global commodity prices from oil to iron ore, thereby cutting China’s import bill.

"A manufacturing-to-services transition probably increases the merchandise trade surplus, as China has less need for iron ore and other imports to fuel a stagnant manufacturing sector," said Derek Scissors, a scholar at the American Enterprise Institute in Washington who studies the Chinese economy and its trade ties with the U.S.

China’s mission to make more of the components that go into its final exports is another part of the story.

"There’s also an issue of the supply chain," said Angel Ubide, senior fellow at the Peterson Institute for International Economics in Washington. "A lot of the exports in China were imports intensive. If China is becoming more self-sufficient, it’s going to import less."

On the flipside, China is buying more services than it provides to other nations. The trade deficit for services jumped to $159.9 billion in 2014 from just $9.3 billion in 2005, according to National Bureau of Statistics data, with more than $100 billion of that shortfall accounted for by Chinese travelers headed abroad.

That two-speed nature of China’s economy was reflected in data Tuesday, with the official manufacturing purchasing managers’ index showing deteriorating conditions while a gauge of services improved from a month earlier.

Rebalancing Rethink

But for Scissors, assumptions that a more evenly spread Chinese economy would also smooth out global imbalances may need to be rethought.

"The idea that Chinese consumers will evolve into a powerful contributor to global prosperity must be modified and there is a considerable risk it may ultimately have to be abandoned," he said.

George Magnus, a London-based senior independent economic adviser to UBS Group AG, said China’s current account surplus is on track to roughly double this year to about 4 percent of GDP. The main reason for this isn’t China’s export prowess, since they have been doing poorly, it’s the plunge in imports, especially of commodities, he said.

"There’s a double whammy going on from weaker volumes that speak to the slide in Chinese output and investment, and from weaker prices that speak to the hiatus in Chinese and global demand," Magnus said. "China’s GDP growth, far from being a contributor to global growth except in a maths sense, is quite the opposite as a result."

— With assistance by Xiaoqing Pi, Kasia Klimasinska, Kevin Hamlin, and Ailing Tan

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