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China: Challenges loom as current account surplus narrows – BBVA

Analysts at the Research Department at BBVA noted important changes to the Chinese Balance of Payments, particularly the continuous narrowing of its current account surplus.  

Key Quotes:  

“China’s long-lasting “twin surplus” of both current and capital account have already changed when capital flows become more unpredictable in the aftermath of 2015 “811” RMB devaluation. Recently, the surplus of the current account also narrowed significantly. Looking ahead, a combination of “current account deficit” and “capital account two-way fluctuation” could become a “new normal” for China’s Balance of Payments (BoP).”

“The US-China trade war negotiation (i.e. China will buy more US goods and reduce its trade surplus against the US), the continuing expansion of service trade deficit, the shrinking saving-investment gap due to aging population will all contribute to this change. This new situation is set to bring new challenges to Chinese policymakers in maintaining domestic financial stability and pushing forward necessary financial liberalization reforms.”

“Thus, it becomes more challenging for the authorities to make a balance between pressing ahead the capital account liberalization and maintaining domestic financial stability. Under this circumstance, the authorities might have to slow the pace of capital account opening and might revert back to capital control and other financial regulation tools.”

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