China’s Current Account Surplus and the Politics of Currency Intervention

China’s current account surplus is about to become a much larger issue for global markets and policy-makers, as it represents a drain on global demand. Recently released 2Q 2020 balance of payments data show China’s surplus expanding again after the COVID-19 outbreak, along with China’s share of global exports. Some of this expansion may moderate as outbound travel from China resumes and the services trade deficit expands once again.

Policy measures in Beijing appear to be driving stronger surpluses, though, rather than promoting market-based adjustments that would reduce external imbalances. China’s “dual circulation” push, the PBOC’s recent management of yuan appreciation, and implied hidden intervention in foreign exchange markets all imply larger surpluses. Recent on-the-ground conversations with exporters suggest a strong outlook for outbound shipments through the end of the year, at least. If there were ever a time for China to back away from currency intervention, that time is now—but we do not expect that to happen.

Posted October 2, 2020
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