China’s Full Balance of Payments Dispel Overcapacity Fears
The persistent concern regarding China’s overcapacity in the industrial sector is often linked to its substantial goods trade surplus, which is approximately US$1.2 trillion. However, this perspective may overlook critical aspects of China’s financial landscape. While the surplus in goods is notable, it represents only one component of the country’s broader external financial situation.
China’s Comprehensive Balance of Payments
China’s total current account surplus stands at US$657 billion, equivalent to 3.4% of its Gross Domestic Product (GDP). A closer examination reveals a more complex financial narrative beyond the goods surplus.
Services and Income Deficits
The nation faces considerable deficits in its services and income accounts. Chinese consumers and businesses significantly invest in foreign services, from transportation to financial consulting. This has resulted in an ongoing services trade deficit of nearly US$200 billion annually, which counters the goods surplus.
- Services trade deficit: Approximately US$200 billion per year
- Total current account surplus: US$657 billion
- Current account as a percentage of GDP: 3.4%
Investment Income Payments
China also makes significant payments to foreign investors, amounting to around US$150 billion. These payments include profits, dividends, and interest from foreign-owned entities within China. This flow of capital reveals another layer of China’s economic interactions.
Understanding Overcapacity
Overcapacity is often viewed as a straightforward issue, but it is a macroeconomic concept requiring deeper analysis. A nation may export goods while simultaneously importing essential services and repatriating income to foreign investors. This multifaceted exchange illustrates that China is not merely offloading excess production onto global markets.
China’s Economic Position
While China is recognized as a major manufacturing hub, it has not yet transitioned into a global rentier economy. In contrast to countries like the United States and Japan, which benefit from substantial net incomes generated from overseas investments, China’s external assets are primarily held in low-yield reserves. Consequently, foreign investors reap significant returns from their investments in China, perpetuating the outflow of income.
This imbalance in returns ensures that China’s overall external balance of payments surplus is capped, prompting a reevaluation of the overcapacity narrative. The situation underscores the necessity for a nuanced understanding of China’s economic complexities.
