China has recorded its first quarterly current account deficit in nearly 17 years, ending its dream run of accumulating trade surplus as a top exporter for a period during which it amassed the world’s largest foreign exchange reserves of over USD 3.14 trillion. China saw a current account deficit of USD 28.2 billion in the first quarter of this year, the country’s first quarterly deficit since the second quarter of 2001, data released yeterday by the State Administration of Foreign Exchange (SAFE) showed.
The goods trade still ran a surplus of USD 53.4 billion, but registered a 35 per cent slump year-on-year, while the service trade posted a deficit of USD 76.2 billion, the biggest quarterly deficit since 1998, China’s Caixin magazine reported. SAFE tried to play it down saying that the rare red figure in the current account was a result of “seasonal factors”, but economists said it could signal a fundamental shift in China’s international payment position, which in turn is a result of global economic rebalance in the last decade. Ding Shuang, the chief China economist with Standard Chartered in Hong Kong, wrote in a note that China has run a current account surplus on an annual basis in the past 25 years and “people tend to take (China’s) surplus for granted”.
The situation that people have been taking for granted for a quarter of a century was about to change, Ding noted. “A moderate shock, against the backdrop of intensifying trade frictions, can push China’s current account into deficit,” Hong Kong-based South China Morning Post quoted him as saying. For China, the dip in its current account could not have come at a worst time as it is engaged in crucial trade talks with the US to meet the demands of President Donald Trump to reduce America’s USD 375 billion bilateral trade deficit immediately by USD 100 billion and USD 200 billion by 2020.
The two-day talks between the US delegation, led by Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He ended here yesterday during which they are reported to have reached some agreements while differences remained. Both sides lined up tariff hikes on a spate of items to resort to a tit-for-tat increase if the trade talks fail amid assertions by Trump that he is ready for a trade war.
The current account surplus was the pride of China for the last 17 years as it emerged as the world’s factory with enormous amount of exports to all nooks and corners of the world. In the process, it accumulated at one time over USD 4 trillion in foreign exchange reserves, unprecedented in the world. China has the biggest holding in US government debt amounting to USD 1.19 trillion last year. In March this year its foreign exchange reserves stood at over USD 3.14 trillion.
China’s growth story was on the decline since the global economic crisis in 2008 after which its exports recorded a steady drop resulting in an economic slowdown with its GDP figures dropping from double digits. Since then it is trying to rejig the economy to depend less on exports and more on domestic consumption. The world’s second largest economy posted 6.9 per cent GDP last year and the government has fixed 6.5 per cent as this year’s growth target. China’s overall trade and current account surpluses have fallen significantly as a percentage of its GDP since 2007. China’s current account surplus declined from 9.9 per cent of GDP in 2007 to 1.3 per cent in 2017, according to data by SAFE.