What China’s Current Account Deficit Means For Investors

Quietly, without much notice among investors, China’s current account surplus, as large as 10% of gross domestic product (GDP) a decade ago, has shifted to a deficit this year. As discussed in a new report by Bank of America, U.S. Trust, this represents one of the most significant global macro shifts of the year and has important implications for investors: less flexibility for economic/currency management in China, and less global capital available for U.S. debtors. 

What China’s Current Account Deficit Means for Investors

 Amid the whirlwind of data, news and noise that shape market expectations, one metric—China’s shift to a current account deficit country—has not received adequate attention, in our opinion. Quietly, without much notice among investors, China’s current account surplus, as large as 10% of GDP a decade ago, has shifted to a deficit this year. This represents one of the largest and most significant global macro shifts of the year.

Why is this important to investors, notably U.S. investors?

First, in the past, China's massive current account surplus (excess savings) gave Beijing the monetary flexibility to drive credit growth and investment at home. The surplus, in other words, gave the Chinese government the necessary countercyclical tools to offset any slowdown or shocks—per the latter, think of the Great Recession of 2008 - 2009 and China’s subsequent massive stimulus program to offset the global shock to trade. The stimulus underpinned growth not only at home but also abroad, helping to stabilize the global economy in a time of peril.

Second, and this is where U.S. investors should be concerned, thanks to its massive current account surplus, China has emerged as one of the world’s largest and most important sources of global capital, becoming a significant exporter of capital in the past two decades. Where was a large part of the savings being exported? You guessed it, to debt-laden America, which has long used China's excess savings to help fuel growth at home and cover ever-widening federal budget deficits. To wit, China owns some $1.2 trillion of U.S. Treasuries, in addition to owning U.S. equities, bonds, commercial real estate and other assets.

Against this backdrop, as China's current account swings from surplus to deficit, Beijing will have less capital to send to the U.S. at precisely the moment when the U.S. government is issuing more debt to cover its widening deficits and needs borrowers—foreign or domestic—to step up. The bottom line: China’s dwindling savings (swing to deficit) reduce China’s role as the world’s exporter of capital—an untimely swing for the U.S., the world’s largest debtor nation.

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