China’s current account

Comments on Yang Yao “China’s current account surplus and inflation”, 27/03/2011, http://www.eastasiaforum.org/2011/03/27/china-current-account-surplus-and-inflation/

While Prof. Yao argues the following:

"As a result, external demand for China’s exports will be strong. While there was a trade deficit in February, this was transitory, likely caused by the spring festival holidays, and China will continue to accumulate large reserves of foreign exchanges this year.

China is moving back toward what happened between 2004 and 2008 where inflationary pressures were high due to large trade surpluses. It is predictable that the Chinese authorities will now deploy a combination of tools to stabilise domestic prices."

While everything is possible, whether China's current account will keep being surplus or will turn to deficit is an open question and there is no certainty for it to be in surplus in the not so distant future, given that so many people have been arguing the so called Lewis turning point in terms of China's rural labour surplus.

It is important to get that judgement right before rush to policy prescriptions.

Having said that, however, it would be prudent to temporarily lift certain import duties effectively by reimburse consumers for buying those goods, before a potential permanent lift.

Another point is that should the US recovery is sustained at a reasonable pace the prevailing international pressure on trade imbalance is more likely to subside substantially. That will have policy implications for both surplus and deficit countries.

In terms of Wong's comments, yes China should have considerable room to consider some direct measures to increase its imports from the US. The question is that China may like to increase more imports of high tech products that the US is not willing to export them.

The US has a policy dilemma in its hands, to contain China's rapid technological advance and limitary spending on the one hand, and to export more to China on the other.