Consequences of high growth of trade surplus
Compared with the cause analysis of China's balance of payments surplus, it is more difficult to judge the consequences. Because the main impact (especially global impact) brought by the large-scale balance of payments surplus is to increase a series of risks, rather than the current economic losses, and even conducive to domestic economic growth in the short term. As long as these risks don't come true, most people can't feel the threat directly; But once it becomes a reality, the consequences are almost incalculable. This is also an important reason why this risk is often underestimated.
Specifically, I think the main risks brought about by the sharp rise in China's balance of payments surplus include:
-The aggravation of the international economic imbalance may bring about a sudden and drastic adjustment of the international exchange rate (especially the US dollar) and the global economy. Under the current huge deficit in the United States, the dollar may fall in the financial market because of panic, the interest rate in the American market will rise sharply, and the economy will suddenly fall into recession. The economic recession in the United States will lead to a greater economic recession in emerging market countries.
-If China's balance of payments surplus continues to rise at a high speed, it will lead to the risk of a sudden adjustment of the RMB exchange rate (and China's economic adjustment) in the future. If China's exchange rate and economy suddenly adjust sharply, it will have a great impact on other countries (especially Asian countries and regions) and international commodity markets.
-Imbalance of payments will inevitably lead to increased trade friction between China and its trading partners. According to American statistics, about 30% of the current account deficit of $720 billion last year came from the deficit with China, which is the largest deficit among all individual countries. As the most important developing country, China's balance of payments surplus has greatly increased, and it is inevitable to face political pressure from the international community for China to adjust its policies.
The rapid growth of China's balance of payments surplus has brought about excess liquidity and passivity of monetary policy. Excess liquidity may bring bubbles in financial markets and real estate markets. With the rapid growth of foreign exchange reserves, the contradiction that the foreign exchange reserve income is much lower than foreign direct investment in China will become increasingly prominent; Once the exchange rate is greatly adjusted, China's foreign exchange reserves will face huge losses.
Reasons for the growth of trade surplus
At present, China's balance of payments surplus mainly comes from the current account surplus. Theoretically speaking, the possible factors to explain the current account surplus at least include: the exchange rate is undervalued; Insufficient domestic demand (behind this, there is a theory that insufficient consumption may come from high savings rate and low investment rate. ); Reduce the fiscal deficit (this is twin deficits's theory); Foreign investment growth (other countries transfer their trade deficit with the United States to China); Import substitution, etc.
We use public data to make some intuitive judgments on the usefulness of the above theoretical judgments. The preliminary results are as follows:
First, the real effective exchange rate has depreciated since 2002, which is basically in sync with the current account surplus, which seems to be one of the reasons for the increase in the trade surplus;
Second, since 2003, China's domestic demand growth has been basically stable, which is not the main reason for the weak import growth.
Third, the change of fiscal deficit intuitively seems to have nothing to do with recurrent surplus;
Fourth, the growth of foreign direct investment is positively related to the current account surplus.
We further use the VAR model to make an empirical analysis of the reasons for the growth of China's trade surplus.
First of all, the order of each factor's contribution to the change of trade surplus /GDP ratio is: exchange rate, foreign investment, external demand and domestic demand. In the past 1 1 year, the change of exchange rate was explained as that the trade surplus accounted for 34% of GDP, followed by foreign investment (3 1%), external demand (25%) and domestic demand (10%) (see the figure below).
Source: Deutsche Bank.
Secondly, the elasticity of trade surplus /GDP ratio, foreign investment, external demand and domestic consumption are 0.4, 0.08, 1 and 0.08 respectively; That is, the nominal effective exchange rate, the proportion of foreign enterprises in exports, the /GDP growth rate of OECD countries and the domestic consumption of China will decrease by 0.4, 0.08, 1 and 0.08 percentage points respectively.
Therefore, assuming that China's policy goal is to gradually reduce the proportion of trade surplus to GDP to close to zero within three years, according to this model, the main changes needed include: the cumulative appreciation of the nominal effective exchange rate of RMB by 7.5%; The proportion of foreign enterprises in exports has been reduced from the current 57% to 50%; The GDP growth rate of OECD countries dropped by one percentage point; Increase the growth rate of domestic consumer demand by one percentage point-they can reduce the proportion of trade surplus to GDP by 3, 0.6, 1 and 0. 1 percentage point respectively, totaling 4.7 percentage points.
Policy implication
The policy implications of the above analysis are:
First of all, governments' cooperation in actively and orderly adjusting international economic imbalances will help reduce the risk of sudden and substantial adjustment of major exchange rates.
Second, although the exchange rate is not the only factor that determines the trade surplus, empirical research shows that the relative role of the exchange rate is more important than other quantifiable factors.
Third, if the balance of payments is to be gradually achieved within a few years, the possible policy combinations include:
-The nominal effective exchange rate of RMB has appreciated by about 2.5% annually. But assuming that the dollar continues to depreciate against other currencies, the appreciation rate of RMB against the dollar should be faster than the average annual rate of 2.5%. For example, suppose that the US dollar depreciates 3% against other currencies every year in three years, and the appreciation of RMB against the US dollar needs to reach 4.5% every year to achieve the goal of 2.5% appreciation of the nominal effective exchange rate;
-adopting a series of policies to control the growth of foreign direct investment at around zero. Specific measures can include combining the two taxes, raising land prices, labor costs, environmental protection costs and other means;
-accelerating the opening of the capital account. Specifically, for example, we can consider raising the ceiling for individuals to purchase foreign exchange unconditionally to $654.38+million per year and allowing enterprises to purchase foreign exchange unconditionally to $5 million, thus further creating conditions for reducing the net inflow of capital. At present, although the thinking of decision makers has begun to change, the phenomenon of "lenient entry and strict exit" still exists everywhere in actual operation;
-effectively expanding the financing channels of foreign enterprises in China, especially allowing foreign enterprises to issue RMB bonds in China, will help alleviate the pressure of net inflow of RMB capital;
-Gradually expand the fluctuation range of RMB against the US dollar (strive to expand the daily fluctuation range to 2% or lower several times in one year), thereby reducing the risk of speculative funds and adjusting the return on investment, and alleviating the pressure of capital inflow to some extent.
Fourth, change other variables (including stimulating domestic demand, adjusting fiscal policy, adjusting export structure, etc. ) will not be statistically significant. ■
The writer is managing director of Deutsche Bank and chief economist of Greater China.
-This article was originally published in Caijing.com.