China’s current account surplus is dwindling fast, reducing sharply the country’s annual capital exports to the rest of the world. In 2007 the surplus was close to 10% of GDP; for 2018, it is estimated to be 0.7%.
This decline in China’s net savings is generally a positive development. Consumption is gradually taking over from investment and net exports as the Chinese economy’s main driving force; the country’s financial position with the rest of the world is consequentially in better balance.
But the shift is causing the Chinese government to rethink its strategies over investment abroad. All this is happening at a time when Beijing’s exports are under pressure from President Donald Trump’s trade barriers. Furthermore, foreign resistance to Chinese investment in strategic industries abroad is growing rapidly, underlined by the continuous sharpening of German restrictions on inward Chinese investment over the past 12 months.
Geopolitically, the question is which countries are going to provide global savings in the years to come. The answer is Japan and Germany. The latter’s current account surplus is steady at 8% of GDP, and the former has staged a remarkable comeback, with a surplus close to 4% of GDP after it was below 1% four years ago.
The problem is that there is considerable evidence that German and Japanese savings surpluses are inadequately and inefficiently recycled into the global economy. China’s falling savings surplus is helping to rebalance the global economy, but other countries are not contributing.
Indeed, global economic imbalances have been persistent and worsened in recent decades. The US has been running a substantial current account and savings deficit since 1976, reflecting the country’s unwillingness to pay for its lifestyle. Japan and Germany reject expansionary economic policies. Instead of dispatching the world towards trade wars, Trump should aim for improved coordination of economic policies among major economic powers.
A big question is how China’s declining savings surplus will affect the country’s funding for the cross-continental Belt and Road initiative and its policy of buying into foreign enterprises.
Media in the US and Europe frequently report on how surges in Chinese investment threaten strategic industries. At the beginning of August, the German government stepped in to prevent the takeover of machine tool manufacturer Leifeld by a Chinese company. In July, Berlin prevailed upon the state financing group KfW to spend €1bn to buy a 20% stake in Germany’s electricity grid operator 50Hertz to fend off a bid by state-owned China Grid.
Unquestionably there are cases of China making strategic purchases of US and European businesses, but the statistics do not support fears of an ‘invasion’. Total Chinese outbound direct investment in 2017 was around $185bn, of which less than $50bn went to the European Union.
There is anxiety in Asia about the Belt and Road initiative and the construction of infrastructure across borders. Many countries are involved, and estimates of the size of the project vary between $1tn-$8tn. Some observers estimate the amount invested so far at $340bn. One of the problems when looking at the total investment is that the Belt and Road, unlike most other projects, has no timeframe.
The pace of buying of global offshore assets over the last decade appears unsustainable. China may have to choose between slowing down investment in overseas enterprises and scaling back the Belt and Road project. Whatever it chooses will have consequences for the global economy.
China may be able to postpone the choice by reducing its stock of US Treasury bonds (around $1.1tn-$1.2tn) to finance purchases of other global assets. Such a sell-off would, however, add one more problem to the already long list of China-US complications.
Joergen Oerstroem Moeller is Senior Research Fellow, ISEAS Yusof Ishak Institute, and a former State Secretary at the Danish foreign ministry.