With the globalization of the economy, cross-border money flow is increasing. There are many companies in Japan that are considering doing business overseas. The import and export of goods is represented by the trade balance. We have summarized the risk of current account balance and trade balance deficit in the Chinese economy.
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Changes in China’s current account balance
China recorded a high growth rate of nearly 10% on average until 2012, after switching to reform and openness in 1978. However, the growth rate has declined in recent years. In particular, the decline in the current account surplus has become clear since 2016. Current account balance is calculated by adding trade balance, service balance and income balance. The income balance refers to interest dividends received from overseas, and by looking at the current account balance, you can know the overall situation of transactions with overseas.
A closer look at the current account balance reveals that the current account surplus has leveled off and the service balance deficit has continued to rise. This is reflected in the current account deficit for the January-March period of 2018. The loss at that time was 34.1 billion dollars. This is the first deficit since April-June 2001. In China, the trade surplus usually shrinks in the January-March quarter due to the Spring Festival. It is believed that the service deficit gradually increased and the surplus decreased, causing the company to fall into the red.
However, China still has a large trade surplus. In 2018, combined exports and imports reached a record $4.62 trillion (Approx. ¥500 trillion). The surplus was $351.76 billion (Approx. ¥38 trillion). This represents a 16% decrease from the 2017 surplus of $421.5 billion (Approx. ¥47 trillion).
Moreover, the majority of that surplus is with the United States. In the past year, there has been a rush of demand before tariffs rise, so if consumer sentiment declines in the future, the surplus will be squeezed in the future.
Why China’s services deficit
One of the reasons for China’s current account deficit was its service deficit. The main reason for this is probably a decline in the travel balance due to an increase in Chinese overseas tourists. Travelers pay for accommodation and transportation at their destination. The travel account deficit is growing due to an increase in people traveling abroad from China.
As China’s economy has developed, more people have joined the ranks of the wealthy in the real estate bubble. As people’s lives became more affluent, overseas travel became popular, and the demand for overseas products increased.
Under the Chinese tax system, it’s cheaper to buy imported goods abroad than in China. Also, as part of Chinese culture, people often shop for family and relatives. This is the explosive buying of Chinese tourists, which became a buzzword in Japan.
The explosive buying by Chinese tourists was also a great boon to the Japanese economy. But I don’t know if it will continue. If China comes to grips with its service deficit, it will start working to reduce its travel deficit.
China is expected to be in a difficult situation due to concerns over the impact of the U.S.-China trade war and a shrinking working-age population. If Chinese tourists continue to make explosive purchases at the same pace, the current account balance will deteriorate and the yuan will be sold.
In 2018, Chinese tourists spent 1,545,000,000,000 yen on trips. This accounts for 34.2% of the consumption of foreign visitors to Japan.
Since Japan’s tourism retail industry is highly dependent on Chinese tourists, curbing this would be a major blow to the tourism retail industry. Tourism is not the only thing that could be curbed. Suppressing investment in overseas real estate and companies will have an impact on the Japanese economy in various industries.
China’s impact on the world economy
The 2019 International Monetary Fund (IMF) Spring World Economic Outlook warned against China’s current account. China’s current account deficit is expected to reach $6.6 billion in 2022.
In order to avoid the collapse of the renminbi, the government is preventing capital outflow and promoting capital inflow. China’s current account deficit reminds us of capital outflows and the weakening yuan. The sharp drop in stock prices following the 2015 China shock pushed the dollar higher and affected many multinational companies that depend on the Chinese market. In order not to repeat the same mistake, each country and each company need to prepare.
Summary
Going overseas also entails country risk. You should investigate in advance what kind of risks there are in the countries you are going to invest in. I recommend that you diversify your risk with overseas investments.
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