In their latest quarterly report on China, the World Bank’s Beijing office estimates that China’s current account surplus will reach $220 billion, or 8.3% of China’s GDP, in 2006. With an estimated $65b in net FDI inflows, the surplus in China’s basic balance of payments will be close to $285b, 10.7% of China’s GDP.
There are some problems with China’s current account data. Reported profits on FDI in China are a bit too low, helping to push up China’s overall income balance. And it is possible that the current account surplus may include some disguised capital inflows, as China has cracked down on other ways of moving money into China.
But the basic story is still clear.
China has a big surplus. It is getting bigger, not smaller. And the increase in the current account surplus has come even as Chinese growth – particularly investment growth – seems to have accelerated.
The World Bank notes that if China slows its economy the same way it slowed its economy back in 2004 – by administrative controls on investment — the result would be less investment, less domestic demand, slower import growth and an even larger current account surplus. That is why the World Bank emphasizes that exchange rate appreciation should play a role this time around. It would help to slow China’s economy while also reducing China’s current account surplus.
The World Bank also spells out something that should be clear to any close observer of China: China is moving up the value-added chain, and increasingly producing previously imported components inside China.
“China’s trade basket is diversifying and moving up market. … The impressive increase in exports stemming from new product varieties in China was highlighted in our May Quarterly Update. Other developments include rapid growth of exports by domestic private firms – up around 50% (yoy) in the first half – and import substitutions and broadening of supply chains by foreign firms that had previously sourced most inputs from abroad. As a result, the share of processing exports in total exports dropped from 54.7% in 2005 to 51% in the first six months of 2006. If this trend continues, external trade will benefit China not only by creating jobs, but also by generating more value added and profits.” (emphasis added)
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