Sustainability of China's current account surplus?

Hello!

I've been reading a lot about how China's current account surplus isn't sustainable, but I'm not really sure why this is. I get that the supplies of cheap labour from the countryside have basically been depleted, so wages will rise, and domestic consumption will increase, but surely this would just mean that the current account surplus will just stop rising, rather than beginning to fall?

Are they implying that other emerging economies will eventually take over from exporting the low cost manufactured goods that China has been doing? (But this doesn't seem like something which is going to happen imminently..)

Reply 1

BananaPie

Original post by blueconstellation

One way to look at it is through rising labour costs which will affect retail prices. Higher retail price will increase the foreign price of Chinese exports, reducing the demand for it in the long-run.

If other emerging economies have lower wage costs and can produce similar products, then China will face a problem.

Reply 2

blueconstellation

Oh, I see now. Thank you!

Reply 3

BananaPie

No problem. And china just recorded a trade deficit a few days ago ^^

Reply 4

blueconstellation

:O Wowzer... I wonder whether this is a part of a trend, then, or just due to the current slow-growth climate.

(edited 11 years ago)

Reply 5

BananaPie

I can't say for sure, but perhaps china is shifting from growth based on exports to domestic growth, I.e. relying less on other countries. This is good in the sense that it allows growth to be more sustainable in the LR

Reply 6

Thriftworks

Original post by BananaPie

No problem. And china just recorded a trade deficit a few days ago ^^

Really, wow. I assumed China would maintain a trade surplus. Do you have figures to back this up?

Original post by BananaPie

Well I don't think they have much choice, if the competitiveness of their wage market decreases they would have to make up for it with heavy investment in capital to boost productivity. This doesn't seem logical when they could instead attempt to shift to an economy based more on consumer demand than exports, which should be easier. However if they do switch to a more consumer dominated economy, people getting wealthier are more likely to become more educated and establish more contact with the wealthier liberal, democratic countries on the West which could lead to social unrest.

Reply 7

BananaPie

Original post by Thriftworks

Really, wow. I assumed China would maintain a trade surplus. Do you have figures to back this up?

Well I don't think they have much choice, if the competitiveness of their wage market decreases they would have to make up for it with heavy investment in capital to boost productivity. This doesn't seem logical when they could instead attempt to shift to an economy based more on consumer demand than exports, which should be easier. However if they do switch to a more consumer dominated economy, people getting wealthier are more likely to become more educated and establish more contact with the wealthier liberal, democratic countries on the West which could lead to social unrest.

China has a deficit of approximately $800m as reported in March =]

http://www.bbc.co.uk/news/business-22088705

Well my take on it is that if they rely less on the international market then they are able to take care of themselves in case something happens to the world economy. =]. I will refrain from making comments about what the Chinese might do in the future. xD. You're right on the fact that if wages keep rising, ceteris paribus, then China loses its edge as an FDI target.

I'm not sure what China's exchange rate with the US now but there should be less of an upward pressure now that exports are starting to dwindle down and stop accusations from other countries (if they're still ongoing)