Since a country’s current-account surplus is the difference between its national saving and its national investment, China’s current-account surplus is likely to continue to shrink in the coming years.
That is consistent with the Five-Year Plan’s goal of basing GDP growth more on domestic demand and less on exports.
Since China’s external surplus is already down to less than 2 percent of GDP, a decline in domestic saving could result in China beginning to run a current-account deficit. In that case, China would no longer be a net buyer of foreign bonds and other assets.
If China wanted to continue to invest in foreign businesses and natural resources, it would have to become a net seller of bonds from its portfolio.
Of course, the new leadership will face serious obstacles as it tries to shift policy in these market-friendly directions. China’s state-owned enterprises are powerful forces in the economy, with substantial political influence; they will resist the shift from heavy industry to services.
Likewise, the widespread and official recognition of corruption introduces a new source of uncertainty into national and local politics.
However, China’s new leaders have signaled where they want the economy to go and have emphasized their determination to reduce corruption. Most important, they have put talented people in charge of the process.
The rest of the world should hope that they succeed.
Martin Feldstein is a professor of economics at Harvard University and president emeritus of the National Bureau of Economic Research. He chaired former US president Ronald Reagan’s Council of Economic Advisers between 1982 and 1984.
Copyright: Project Syndicate