China Foreign Trade

The China reopening story is all the rage now, eclipsing the last year’s “star topic” of massive external surpluses. What to make of it? We do not want to focus too much on year-on-year changes in exports and imports (these can be noisy), but slowing global growth is a headwind for Chinese exports going forward, whereas imports should eventually get a boost from the removal of the COVID restrictions. And this means that China’s trade surplus – which reached USD78bn in December – had peaked (barring the unexpected – see chart below). In terms of GDP accounting, narrowing trade surpluses translate into smaller net exports’ contribution to growth. How much are we talking about? Net exports accounted for about 21% of China’s GDP growth in 2021 and for an even larger share in 2022. The question is whether domestic consumption will be strong enough to compensate for a smaller contribution. The consensus is currently in the waiting mode, keeping China’s 2023 GDP forecast unchanged at 4.8%.

China Exchange Rate

Changes in China’s external surpluses inevitably invite discussions about the exchange rate – and it is important not to overlook another component of the country’s balance of payments, capital account. The reopening trade is already attracting inflows and many investors – who were scarred (and scared) by China’s handling of the pandemic, as well as tighter real estate/tech controls – are still waiting on the sidelines. The experience of China’s inclusion in global bond indices a few years ago shows that sizable inflows can be very currency-positive, even to the point of offsetting the impact of less “friendly” interest rate differentials and other fundamentals.

EM External Adjustment

China is not the only emerging market (EM) where external balances are watched closely. A combination of wide current account deficits and uncertain fiscal adjustments – against the backdrop of higher global interest rates – in Central Europe and parts of LATAM raised concerns about the size of financing requirements and the cost of debt service going forward. These are the reasons why many observers treated the latest U.S. dollar-denominated bond issues in Central Europe with suspicion (“why now?”), even though the bonds were quite popular with investors. Today’s smaller than expected current account deficit in Poland (November) was a welcome development, as it confirmed the improving trend. But we are yet to see similar signs in Chile (the current account deficit reached 10.7% of GDP in Q3-22) and Colombia (6.7% of GDP in Q3-22). Stay tuned!

Chart at a Glance: China’s Trade Surplus Had Peaked

Source: Bloomberg LP