China’s Current Account: Living on the Edge

Preliminary data show China’s 2018 current account surplus fell to $49.1 billion, the lowest level since 2003. Should the current account continue declining, the exchange rate would face long-term depreciation pressure as more capital inflows would be needed to stabilize China’s international payments. Several trends will weigh on China’s current account balance this year, including the US-China trade dispute. Based on a global trade model simulation, we expect bilateral tariffs to reduce China’s imports more than its exports over the next five years, suggesting a net positive impact on the current account. More important for a balance of payments-driven view on the currency this year are levels of capital inflows and monetary policy divergence between the United States and China.

Posted March 7, 2019
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