China’s Current Account Deficit
A statement or record of all domestically and internationally conducted financial and commercial transactions over time is referred to as a payment balance. This dataset contains transactions made by corporations, agencies, and persons. Regular monitoring of these transactions enables the nation to manage its cash flow and enact policies that can establish a strong economy. In other words, income and expenses must be balanced, but in most instances, that does not occur. In the first half of the year, China’s overall balance of payments deficit increased to a new high due to higher government expenditure, declining land sales, and income tax exemptions. China’s account balance recorded a deficit of USD 77.5 billion in the second quarter of 2022, with a surplus under goods traded, a deficit under services trade, a deficit under primary income, and a surplus under secondary income (Cheng & Zhu, 2022). Under the financial account cash outflows, a deficit was noted in the capital and financial accounts.
Factors Behind China’s Deficit
China’s current account surplus has considerably reduced from its peak, and the external situation in 2018 was consistent with effective policies and intermediate fundamentals. The trend decline has been chiefly structural, fueled by economic misalignment from an investor to utilization, disapproval of the real effective exchange rate (REER) towards equilibrium, decrease in tourist numbers primarily due to COVID, and irrationality in goods surplus reflecting market unsaturation and China’s decreased growth pace than trading partners (Cheng & Zhu, 2022). When trade between trade relations is not roughly equal, trade deficits create a problem. For instance, the U.S. argues that China is not honoring its trade obligations and that measures must be implemented. Trade restrictions or tariffs are typically the results, which can raise the expense of imports for the offending country leading to a current account deficit.
Policies to Improve the External Position of the Country
To ensure that extreme deficits do not recur and to make the economy and financial system ready to withstand more volatile capital flows, policies should focus on ongoing rebalancing and opening the doors. Statistically, the fall in China’s surpluses has alleviated imbalances, albeit the effects have differed by nation (Bildirici & Kayıkçı, 2022). As response measures are implemented, policy adaptation will be essential, and the focus can change from assistance to reduce hardship and preserve the economic capacity to stimulus for improving the economy. However, with containment and mitigation measures being raised gradually or partially, this recovery progression is likely to be linear and consistent and might aid the recovery process.
The cost of the deficit and the price of responding to it can be addressed in part by tax policy. Financial disclosure restoration programs shouldn’t start too early, but tariffs will play an important role when they do. After the decline, revenue levels and taxes may need to adjust. This can occur in conjunction with other measures to progressively lower the situation’s costs (Bildirici & Kayıkçı, 2022). A strategy that enhances the tax on capital outflows in proportion to the magnitude of the influx could significantly decrease excessive individual borrowing and the government’s budget deficit. Monetary policies may reduce investment and distort asset prices, and they may also be able to stop overly property speculation, as was the case before the economic crisis.
References
Bildirici, M., & Kayıkçı, F. (2022). The relation between growth, energy imports, militarization and current account balance in China, Israel and South Korea.Energy, 242, 122537.
Cheng, T., & Zhu, J. (2022). An empirical analysis about optimal scale of China’s foreign exchange reserves.Journal of Service Science and Management, 13(02), 357–376.