Ultimate magazine theme for WordPress.

China’s record trade gap is a symptom of the struggle to rebalance its economy

The author is a finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global Policy

China last Friday reported the largest monthly trade surplus in its history. At $94.5 billion, it was the last in nearly two years of record monthly surpluses, even as Chinese consumption stagnated.

But while it may seem like sheer luck for China that its soaring trade surplus came just in time to offset stagnant consumption, this misunderstands the relationship between domestic consumption and trade. Contrary to what many assume, the country’s growing trade surplus is neither a symptom of productive power nor evidence of a culture of thrift. Rather, it is a consequence of the great difficulty China has had in rebalancing its domestic economy and containing its mounting debt.

Because the very conditions that explain stagnant domestic consumption also explain the rapid growth of Chinese exports relative to imports. Incidentally, this applies not only to China, but to all countries with persistent trade surpluses. Regardless of whether they are high-wage countries like Germany and Japan or low-wage countries like China and Vietnam, their international competitiveness is mainly based on the low wages their workers receive in relation to productivity.

But the very low wages relative to productivity limit their households’ ability to consume a significant part of their output. In all of these countries, households receive a smaller share of the gross domestic product than in their trading partners, which is why they also consume a smaller share.

That’s not always bad. In the 1980s, suppression of consumption allowed Beijing to channel vast amounts of newly produced resources into much-needed investment. The result was rapid, sustained growth as China built much-needed infrastructure and manufacturing capacity.

However, that all changed about 10-15 years ago when China began investing as much in real estate development and infrastructure as it could productively absorb. At this point, the debt used to finance investments grew faster than the economic benefits of those investments, eventually leaving the country with one of the fastest-growing debt burdens in history.

Beijing has known the solution to this problem for years. To keep the rising debt and the unproductive investment it financed under control, it had to balance the income distribution so that growth was mainly driven by rising consumption, as is the case in most other economies. However, this requires a politically difficult restructuring of the economy, with a larger share of total income – up to 10-15 percentage points of GDP – being transferred from local governments to Chinese households.

This is why the trade surplus is important. In recent years, Beijing has attempted to curb debt growth by reducing unproductive investment in real estate and infrastructure. As we saw with Evergrande, Beijing has hit the real estate sector hard this year.

If an increasing share of China’s total income had gone to ordinary households, the resulting drop in property developer investment could have been offset by an increase in consumption. But that didn’t happen. In the past two years, partly as a result of the Covid pandemic, wage growth has even lagged behind GDP growth. Chinese workers’ share of their production has fallen rather than increased, and with it the share they can consume.

Because of this, China’s monthly trade surpluses have nearly doubled over the past two years. Larger trade surpluses, fueled by a falling household share of GDP, are allowing Chinese manufacturers to absorb weaker domestic demand without reducing production. Without these surpluses, Beijing would have to let its debt mount even faster if it didn’t want factories to lay off workers.

Rising exports are usually a good thing, but for countries like China, rising trade surpluses are not. In this case, they are symptoms of deep and persistent imbalances in the national income distribution. Until the country is able to reverse these imbalances, which has proved very difficult politically, these large surpluses are just the downside of Beijing’s attempts to control debt and will therefore remain in place.

This is of great importance in a world grappling with weak demand. For China to run surpluses of nearly 5 percent of its GDP, the rest of the world must run deficits of a staggering 1 percent of its collective GDP. As Beijing struggles with its mounting debt and difficulty in rebalancing domestic income, the rest of the world will have to continue absorbing China’s burgeoning trade surplus.

Comments are closed.

%d bloggers like this: