《China & World Economy》2015年第1期刊发我院谭小芬教授与中国社科院张明副研究员共同合作撰写的文章《The Vanishing of China’s Twin Surpluses and its Policy Implications》

Abstract: This paper argues that the twin surpluses in China’s balance of payments will disappear in the future as a result of external and internal structural changes. China’s current account surplus will diminish as a result of the decline in the goods trade surplus, the expanding service trade deficit and negative investment income. China’s capital account might shift from surplus to deficit as a result of shrinking net direct investment inflows and more volatile short-term capital flows. When the twin surpluses no longer exist, the normalization of the US treasury bond yields will be sped up, terminating the one-way appreciation of the RMB exchange rate; the People’s Bank of China’s pressure to sterilize inflows will be alleviated, and new problems for the People’s Bank of China’s monetary operation will emerge; new financial vulnerabilities for the Chinese economy will arise. Finally, the present paper provides some policy suggestions for the Chinese Government to deal with the declining twin surpluses.

China has had both a current account surplus and a capital account surplus for over a decade. However, the twin surpluses could be gone in the future due to certain structural factors. The liberalization of domestic factors, the appreciation of the RMB exchange rate and the weak external demand will push the goods trade surplus down. The opening up of the Chinese service sector and financial market might widen the service trade deficit and amplify negative investment income. As a consequence, China’s current account surplus is likely to shrink in the future. The structural adjustment of Chinese economy would weaken the incentive for FDI, but the incentive for domestic enterprises to invest abroad would strengthen under the support of the Chinese Government, which would reduce or even reverse the net direct investment inflow. The scale of short-term capital flows would increase, but they are very volatile. Therefore, China’s capital account balance would face some uncertainty. For example, the capital account might shift from surplus to deficit very quickly due to internal or external impacts.

The gradual vanishing of China’s twin surpluses would generate some important policy implications for both the global and domestic economies. The US Government might find it more difficult to finance their fiscal deficit, so they would have to raise the yields of treasury bonds significantly. The one-way appreciation process of the RMB against the US dollar would terminate soon, and the possibility of the RMB’s depreciation against the US dollar under some scenarios could not be excluded. The sterilization pressure for the PBC would be alleviated; however, the PBC should find a new channel to issue base money. The diminishing twin surpluses together with the accelerated capital account openness might bring about new financial vulnerability for the Chinese economy, especially increasing the risk of potential capital outflows.

To deal with the new impacts brought by the shrinking of the twin surpluses, we provide the following policy suggestions for the Chinese Government. First, to avoid a large service trade deficit in the future, the Chinese Government should break the monopoly of SOEs in many service sectors and open up these sectors to domestic private enterprises as soon as possible, in order to enhance the competitiveness of the Chinese service sector more quickly. Second, to improve the yields of Chinese overseas investment, on the one hand, the Chinese Government should continue to encourage domestic enterprises, especially domestic private enterprises, to investment abroad; on the other hand, Chinese households’ overseas investment could also be allowed and encouraged at a gradual and controllable pace. Third, the Chinese Government should continue to liberalize its capital account in a cautious and gradual way to avoid a financial crisis. At least the full openness of China’s capital account should follow three prerequisites: the RMB’s exchange rate and interest rate mechanism should be largely liberalized; the domestic financial market should be open to domestic private players first; the existing vulnerabilities of the domestic financial market could be detected and handled. Fourth, even after the Chinese Government liberalizes the capital account, the short-term capital flow should still be closely monitored by the PBC. If necessary, some price-based policy measures (such as Tobin tax or macro-prudential regulations) could be introduced to reduce the negative impacts of volatile capital flows.