China has the world’s biggest trade deficit-in services

China has the world’s biggest trade deficit—in services

Feb 15th 2014 | HONG KONG | From the print edition

NOT long ago, China’s cheap currency and its large current-account surplus were the biggest controversies in global economics. American policymakers accused China of manipulating its currency for competitive gain and flew to Beijing to convey their displeasure. Some commentators blamed the global financial crisis on China’s surplus and its accumulation of safe American bonds, which encouraged America’s financial industry to invent lucrative, but toxic, substitutes. After the crisis, they then blamed China’s surplus for America’s failure to export its way out of trouble.


The controversy has never entirely disappeared, but it has diminished. Having peaked at over 10% of GDP in 2007 (see chart), the surplus narrowed to just over 2% of GDP ($189 billion) last year, according to figures released last week. China’s exports of goods vastly exceeded its imports, as always. But this imbalance was partially offset by another component of trade: services. At $122 billion in 2013, China’s services deficit is by far the biggest in the world.

What lies behind this big gap? One industry stands out: tourism. Five years ago, China earned a surplus from cross-border travel. Visitors from outside the mainland spent more in China than the mainland’s own travellers spent overseas. But the number of arrivals fell last year by 2.5%. Meanwhile the number of China’s outbound tourists rose by 18%. As a result, China’s deficit in travel spending rose to $80 billion in 2013, points out Thilo Hanemann of the Rhodium Group, a research firm.

Such trends suggest that China’s surplus could narrow further. Zhang Zhiwei of Nomura thinks it will drop to 0.4% of GDP by 2015. This will be helped by a less competitive yuan. Last year China’s exchange rate, weighted by trade and adjusted for inflation, rose by over 7%, according to the Bank for International Settlements. Only the Icelandic krona and Israeli shekel rose more. The yuan’s rise is even more dramatic when compared with the countries it competes against in world markets. Their currencies have mostly plunged since America’s Federal Reserve said it would slow down its asset purchases. China’s has continued to strengthen.

Yet despite these trends, China’s surplus can still generate disagreement. Stephen Green of Standard Chartered predicts that it will widen again in 2014, helped by an increase in global demand. Strong export figures in January seem to support this view, assuming the numbers were not flattered by faulty invoicing and a rush to fulfil orders before the Chinese New Year. Mr Green argues that the surplus will increase to 3.6% of China’s GDP this year. That does not sound too dramatic. But, as he points out, China’s economy is now far bigger than it was when it was causing so much international consternation. Thus a surplus worth 3.6% of GDP this year could be bigger in dollar terms than the 10% surplus in 2007. In other words, he writes, 2014 is likely to be the year when China’s balance of payments re-emerges as a problem for the world.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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