Don’t fear China’s trillion-dollar trade surplus

LAST year, the gross domestic product of only 19 countries exceeded US$1 trillion. That puts the latest news from China’s customs administration into stark context.

On Dec 8, it reported that the country’s net exports of goods in the first 11 months of the year already exceeded US$1 trillion, more than any previous surplus. Even as America whacked tariffs on China, its enterprising manufacturers expanded into alternative markets and discovered roundabout routes past America’s trade barriers.

The size of the surplus is causing anxiety around the world. “The imbalances we see accumulating today are not sustainable,” said Emmanuel Macron, France’s president, on a visit to Beijing this month.

A recent report on China’s export muscle by Goldman Sachs was titled Beggar thy neighbour. And on Wednesday (Dec 10), the International Monetary Fund (IMF) called on China to fix its imbalances.

As with many things to do with China’s economy, however, a degree of perspective is just as valuable as a sense of awe. The monster surplus is not as scary as it looks. Moreover, it causes problems not for the rest of the world, but for China itself.

For a start, the trillion-dollar surplus counts only physical goods passing through customs. It does not include services, which would subtract about US$180 billion from the total. It also fails to capture some transactions between multinational firms and local contract manufacturers in free-trade zones on China’s territory but outside its customs border.

A broader measure of China’s dealings with the rest of the world is its current-account surplus. This has reached US$650 billion over the past four quarters (although some analysts have doubts about how it is measured). That is still a big number.

But China – trust us – is a big economy. Its surplus amounts to about 3.4 per cent of its GDP. The IMF noted that 45 economies have a surplus bigger than what they had in the year before. Eight of them are in Macron’s European Union.

The focus on imbalances also misdiagnoses Europe’s true concern, which is the hollowing out of its domestic industry. The real problem is that European manufacturers now struggle to compete with Chinese carmakers and electronics firms. That would be the case even if China spent much more on commodities and other imports, and its trade surplus fell to zero.

Furthermore, China’s reluctance to buy foreign things does not extend to foreign assets. In return for its exports, it has bought bonds, extended loans, acquired equities and built factories overseas. These assets represent claims on the future. China is thus selling stuff today in return for stuff in the future. Trade is an exchange. But the exchange does not have to be simultaneous.

China’s eagerness to save was once hard for the world to accommodate. After the global financial crisis of 2007 to 2009, everyone wanted to retreat into their shells and spend less than they earned. Central banks cut interest rates towards zero. But there was not enough demand to go round.

In that world, China’s surpluses could be accused of beggaring its neighbours. Its net exports “drained” demand from countries that were suffering from a shortage of spending.

Things are different now. In many big economies, inflation is at or above the central bank’s target. Spending is strong enough to keep unemployment low at home, with a bit leftover to purchase China’s excess production, too. If central banks are worried about a lack of demand, they have room to cut rates, as the US Federal Reserve did on Wednesday.

Indeed, China’s surplus is more a problem for itself than for the rest of the world. It is the only big country where inflation looks dangerously low. Hiring is weak, consumers lack confidence, and the property market has entered its fifth year of a seemingly intractable slump. The central bank is worried that lower interest rates will hurt banks’ margins. And the government is reluctant to do whatever it takes to turn things round.

China’s policymakers have instead relied on unexpectedly strong exports to keep growth on track. That could prove to be a mistake. If the trade war spreads to Europe, or the global economy suffers from an artificial intelligence bust, foreign demand could easily falter. China would then be forced to make a big fiscal push to revive domestic spending.

Its task could be all the harder for having been delayed. The longer gloomy sentiment persists, the less easy it is to dispel. And China could find itself trying to revive the confidence of consumers and homebuyers just as the world economy is wilting.

China has become dependent on the spending of foreigners to stabilise its own economy. It is not being anti-social. It is being unwise.

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