The Economist: Tourism and the trade balance, A number of great import

The Economist

Tourism and the trade balance. A number of great import

China has the world’s biggest trade deficit—in services
Print edition | China
Feb 15th 2014
| HONG KONG

NOT long ago, China’s cheap currency and its large current-account surplus were the biggest controversies in global economics. American policymakers accused China of manipulating its currency for competitive gain and flew to Beijing to convey their displeasure. Some commentators blamed the global financial crisis on China’s surplus and its accumulation of safe American bonds, which encouraged America’s financial industry to invent lucrative, but toxic, substitutes. After the crisis, they then blamed China’s surplus for America’s failure to export its way out of trouble.
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The controversy has never entirely disappeared, but it has diminished. Having peaked at over 10% of GDP in 2007 (see chart), the surplus narrowed to just over 2% of GDP ($189 billion) last year, according to figures released last week. China’s exports of goods vastly exceeded its imports, as always. But this imbalance was partially offset by another component of trade: services. At $122 billion in 2013, China’s services deficit is by far the biggest in the world.

What lies behind this big gap? One industry stands out: tourism. Five years ago, China earned a surplus from cross-border travel. Visitors from outside the mainland spent more in China than the mainland’s own travellers spent overseas. But the number of arrivals fell last year by 2.5%. Meanwhile the number of China’s outbound tourists rose by 18%. As a result, China’s deficit in travel spending rose to $80 billion in 2013, points out Thilo Hanemann of the Rhodium Group, a research firm.

Such trends suggest that China’s surplus could narrow further. Zhang Zhiwei of Nomura thinks it will drop to 0.4% of GDP by 2015. This will be helped by a less competitive yuan. Last year China’s exchange rate, weighted by trade and adjusted for inflation, rose by over 7%, according to the Bank for International Settlements. Only the Icelandic krona and Israeli shekel rose more. The yuan’s rise is even more dramatic when compared with the countries it competes against in world markets. Their currencies have mostly plunged since America’s Federal Reserve said it would slow down its asset purchases. China’s has continued to strengthen.

Yet despite these trends, China’s surplus can still generate disagreement. Stephen Green of Standard Chartered predicts that it will widen again in 2014, helped by an increase in global demand. Strong export figures in January seem to support this view, assuming the numbers were not flattered by faulty invoicing and a rush to fulfil orders before the Chinese New Year. Mr Green argues that the surplus will increase to 3.6% of China’s GDP this year. That does not sound too dramatic. But, as he points out, China’s economy is now far bigger than it was when it was causing so much international consternation. Thus a surplus worth 3.6% of GDP this year could be bigger in dollar terms than the 10% surplus in 2007. In other words, he writes, 2014 is likely to be the year when China’s balance of payments re-emerges as a problem for the world.
Print edition | China
Feb 15th 2014
| HONG KONG
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