I challenge anyone who doesn’t know that China is an oil importer to find a way of distinguishing China’s current account surplus from those of the major oil exporting regions. You almost would think from looking at a graph of China’s current account surplus against those of the big oil exporters that China exports oil.
To me, the fact that China’s current account surplus has soared even as oil and commodity prices have soared is one of the great puzzles of the world economy.
It is related to another puzzle. China has had one of the world’s all time great investment booms, a boom that has raised investment from around 40% of China’s GDP to around 50% of China’s GDP. That boom is one reason why commodity prices have soared. Investment booms usually generate current account deficits. But in China’s case, the investment boom has coincided with an even bigger savings boom – so savings has grown even more than investment.
The results of this show up clearly in the US data. The US is – in a global sense – the counterparty to both the oil exporters’ surplus and China’s surplus. I plotted the US bilateral balance (a rolling four quarter sum) with the main Asian economies and the US bilateral balance with the countries that export oil to the US – oil exporting Asia, Venezuela and Africa in the US data. The US also imports oil from Canada and Mexico, but it also imports a lot of manufactured goods from its NAFTA partners. So I left them out of the picture.
Be forewarned, the scales are different. But the basic picture is clear – the US bilateral deficit with both Asia and oil exporters has risen sharply. And please, after looking at this picture can we all dispense with the now very dated argument that the United States soaring deficit with China just reflects shifts in production inside Asia. That was arguably true through 2003, but the United States overall deficit with Asia – not just its deficit with China – has soared since then. Look at the blue line.
A higher oil import bill should mean less for other goods. But not for US. At least not from 2002 through the first quarter of 2006… the US, as we all know, has borrowed to buy more of everything.
Helped on by a big credit line from – you guessed it, China and the world’s oil exporters.
The global equilibrium, in a nutshell.
(p.s. this graph doesn’t include q2 data. But it is clear that the growth in imports from Asia is slowing, while the US oil import bill is still growing – so the close correlation may be breaking down, just a bit. The beginning of this shift already shows in the changing slope of the Asian curve)