The author is a professor of finance at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global Policy.
China announced last Friday the largest monthly trade surplus in its history. At $94.5 billion, it was the last record monthly surplus in nearly two years, even as Chinese consumption stagnated.
But while it may seem like sheer luck for China that its skyrocketing trade surpluses arrived just in time to balance stagnant consumption, it misunderstands the relationship between domestic consumption and trade. Contrary to what many assume, the country’s burgeoning trade surplus is not a symptom of manufacturing prowess, nor proof of a culture of thrift. Rather, it is a consequence of the great difficulty China has had in rebalancing its domestic economy and containing its growing debt.
Indeed, the very conditions that explain the stagnation of domestic consumption also explain the rapid growth of Chinese exports relative to imports. This is true, by the way, not just for China, but for all countries with persistent trade surpluses. Whether in high-wage economies, such as Germany and Japan, or low-wage economies, such as China and Vietnam, their international competitiveness is based primarily on the low wages their workers receive relative to the productivity.
But it is precisely low wages relative to productivity that limit their households’ ability to consume a substantial share of what they produce. In all these countries, households receive a lower share of gross domestic product than their trading partners, which is why they also consume a lower share.
That’s not always a bad thing. In the 1980s, the suppression of consumption allowed Beijing to channel huge amounts of newly produced resources into much-needed investment. The result has been rapid and sustained growth as China has built the infrastructure and manufacturing capacity it urgently needs.
However, that changed about 10 to 15 years ago once China started investing in property development and infrastructure as much as it could productively absorb. This is when the debt used to fund the investment grew faster than the economic benefits of that investment, ultimately leaving the country with one of the fastest growing debt burdens in the world. ‘story.
Beijing has known the solution to this problem for years. In order to control soaring debt and the unproductive investments it finances, it needed to rebalance the distribution of income sufficiently so that growth would be driven mainly by rising consumption, as is the case in most other economies. But this requires a politically difficult restructuring of the economy in which a greater share of total income – up to 10 to 15 percentage points of GDP – is transferred from local governments to Chinese households.
This is why the trade surplus is important. In recent years, Beijing has tried to slow debt growth by reducing unproductive investment in real estate and infrastructure. This year, as we saw with Evergrande, Beijing has hit the real estate sector hard.
If an increasing share of China’s total income had gone to ordinary households, the resulting reduction in investment by property developers might have been offset by a rise in consumption. But that’s not what happened. Over the past two years, partly due to the Covid pandemic, wage growth has actually lagged GDP growth. The share that Chinese workers have received from what they produce has diminished rather than increased, and with it the share that they are able to consume.
This is why China’s monthly trade surpluses have nearly doubled over the past two years. Larger trade surpluses, driven by a declining household share of GDP, allow Chinese manufacturers to absorb weaker domestic demand without cutting production. Without these surpluses, Beijing would have to allow the debt to grow even faster if it did not want factories laying off workers.
Increased exports are generally a good thing, but for countries like China, increased trade surpluses are not. In this case, they are symptoms of deep and persistent imbalances in the domestic distribution of income. Until the country is able to reverse these imbalances, which has proven politically very difficult, these large surpluses are just the flip side of Beijing’s attempts to control the debt, and so they will persist.
This is very important in a world with low demand. For China to run surpluses of almost 5% of its GDP, the rest of the world must run deficits equivalent to an astonishing 1% of its collective GDP. As Beijing grapples with its growing debt and the difficulty of rebalancing domestic incomes, the rest of the world will have to continue to absorb China’s burgeoning trade surpluses.