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Falling Trade Surplus Masks Imbalance: IMF

April 17, 2012

China’s achievement of greater balance in trade flows is masking a deepening imbalance in the domestic economy, according to International Monetary Fund staff.

“Evidence increasingly points to a rising domestic imbalance as growth becomes increasingly dependent on very high levels of investment,” IMF staff wrote in a working paper. The institution yesterday cut its estimate for China’s current- account surplus, the broadest measure of trade, to 4 percent to 4.5 percent of gross domestic product over the “medium term,” from around 7.5 percent estimated in a July report.

The revised forecast, released ahead of IMF, World Bank and Group of 20 meetings in Washington this week, may bolster China’s defense against calls for a stronger yuan to address lopsided trade flows. At the same time, the IMF staff said China must boost consumption or risk creating instability that would have consequences for the global economy.

“Despite the fact that China’s medium-term current account is likely to stay below its pre-crisis range, it is too early to conclude that this signals an end to global imbalances or that ‘rebalancing’ has been truly achieved in China,” the staff wrote in the paper.

The report, titled “An End To China’s Imbalances?,” was written by five staff members including Nigel Chalk, the fund’s Washington-based China mission chief, and released yesterday with the IMF’s World Economic Outlook. The staff’s views shouldn’t be reported as representing those of the institution, the IMF said.

Yuan Move

The paper was prepared before China’s move on April 14 to double the yuan’s daily trading band against the U.S. dollar, an adjustment the People’s Bank of China said aimed to meet “market demands,” promote price discovery and enhance the currency’s two-way flexibility.

Premier Wen Jiabao said on March 14 the currency may be near an “equilibrium” and People’s Bank of China Governor Zhou Xiaochuan said two days earlier that the market is playing a bigger role in determining the nation’s exchange rate.

China’s current-account surplus surged to 10.1 percent of gross domestic product in 2007 as the nation’s trade surplus widened. The excess dropped to 2.8 percent last year, a reversal that was “sharper and more persistent than expected,” the IMF staff said.

China’s policy makers have pledged to rebalance the economy away from investment and exports to consumption.

The government has changed policies in areas including building a social safety net, expanding public housing, scaling back subsidies and making energy and other commodity prices more market based, the IMF staff said. Wages have climbed and the currency has appreciated.

Even so, “there is little evidence so far that they have created a turnaround in national savings behavior either at the corporate or household level,” the analysts said. Many policies will have “long lags” before their impact is “clearly seen” and their effect on household income and consumption will become “steadily more discernible,” the staff said.

To contact Bloomberg News staff for this story: Nerys Avery in Beijing at

To contact the editor responsible for this story: Paul Panckhurst at

Too Cool for Crisis Management
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