China Research

Most international analysts are well aware of the fact that the economy of China has been slowing down substantially in the past decade. There are different reasons for this, both temporary and structural ones. The research institute of the Finnish central bank (The Bank of Finland Institute for Emerging Economies, Bofit) is regularly also analyzing China, both scientifically and statistically – with high quality (https://www.bofit.fi/en/monitoring/weekly).

Clarification by different time series
The table I apply below, is actually taken from this source. Please have a look at it and join me for some indicators (https://www.bofit.fi/en/monitoring/statistics/china-statistics/) – and you will easily recognize that the Chinese economy indeed has been downsizing. This development is visible despite the fact that statistical standards still are questioned by many foreign analysts for being too positive (which we do not know for sure anymore even if it certainly has been the case in the past).
Anyway, the tables produced by Bofit show a very visible downturn of GDP-growth rates, for example from 10,6 percent in 2010 to 5 percent in 2024. The sky is not the limit anymore for Chinese GDP growth, reflecting the so-called middle-income trap and other structural deficits, for example coming from huge government support to state-owned enterprises (SoEs). A similar trend can be observed for industrial production.

Even more dramatic looks the downturn of fixed investment, nowadays achieving only small increases. This happened on the other hand after years of overinvestment with investment ratios up to 45-50 percent of GDP (normally around 30 percent). But also Chinese consumers have become uncertain about their future – leading on trend to a much lower growth rate of private consumption or propensity to consume as economists call it. Chinese exports, however, have been performing quite well also more recently (e.g. in 2024 still the largest supplier of the German economy).

Finally, the balance on current account still achieves surpluses but they have been shrinking quite strongly. Such surpluses mean that there is no need of borrowing money in foreign currency, even if it happens for diversification reasons. If China one day should face considerable deficits in the current account balance – let’s assume more than 5-6 percent of GDP – recognizable improvements of macroeconomic statistics will certainly be claimed by global financial analysts and investors.

Summary: It could be a good idea to regularly study Bofit’s publications on emerging markets.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University

Economic success of a country is a function of balanced developments – particularly in five areas: politics, macroeconomics, government debt, financial markets and the balance on current account (without talking here about all the important subfactors like institutions, education, national health, etc).

When one or several of these five areas strongly move into the wrong direction – both in advanced and emerging market countries – a serious crisis cannot be ruled out. There are sufficient examples from the past 40-50 years in the emerging world – Brazil, Argentina, Mexico, Russia, Turkey, Indonesia, Thailand and Malaysia, to mention some of them. Interestingly, all the economic crises of the above-mentioned countries were triggered by their rapidly weakening current account balances.

Somewhat simplified, the current account summarizes exports minus imports of goods (trade balance), services and of international financial transfers. A deficit reflects a debt vis-à-vis the rest of the world that can be financed in the short run in four different ways: foreign direct investment, sales of stocks and bonds to other countries, borrowing abroad and – if still possible – by reducing the own foreign exchange reserves.

It also should be stressed that even advanced countries can suffer from serious current-account turmoil – with Sweden in the 1970s and 1980s as an extraordinary good – or bad – example.

When do negative current account become critical?
In order to get an idea about the size of a country’s current account position, the quarterly or annual results are related to GDP. There never have been exact numbers about the point when a critical development of a deficit in the current account really may start. Going back to the so-called Asian crisis in the late 1990s with the starting points in Thailand and Malaysia, these two countries had deficits in the current account of around 8 percent of GDP. This was high enough to make the current-account bubble burst. A few years earlier, the so-called Tequila crisis in Mexico was initiated by the same 8-percent deficit ratio.

Then, I usually gave the current-account development special attention when the 5-percent “limit” was about to be exceeded. This special attention grew even further when major emerging countries with sizeable financial markets were involved such as Brazil, Argentina or Mexico.
Today, however, the previous “5-percent warning signal” obviously has been moved upward in more and more cases – without having a guiding feeling for the “new critical level”. Probably, a kind of “case by case”-model looks closer to reality and more applicable. Anyway, when a country is moving close to 8-10 percent of GDP, my concerns still increase.

Negative examples many times in more advanced countries
Finally, it may be interesting to sum up a number of countries with currently positive and unhealthy current account ratios to GDP,(https://www.ceicdata.com/en/indicator/current-account-balance–of-nominal-gdp). Interestingly, more negative examples can currently be found among the more advanced countries than in the emerging world. On the other hand, limited deficits in the current account seem to be accepted quite well when these deficits can be derived from investments in the future.

Current account positions (% of GDP, Sep 2024)
U.S. -4.2
EU +2.8
Japan +14.2(April)
China +3.1
Germany +5.2
Sweden +6.1
Italy +1.9
France 0
Croatia +19.4
Latvia -4.6
Romania -9.3
Russia +1.4
Serbia -9.7
Ghana +5.6 (June)
South Africa -1.0
Vietnam +6.6 (2023)
Thailand +1.5
Indonesia +0.9 (March)
Pakistan -0.5 (2024)
India -1.2 (June)
Philippines -4.3 (Mar)
Argentina +0.8
Mexico +0,2
Brazil -3.4
Chile -3.9

Conclusion – improved current account in many (emerging) countries
Current statistics indicate that the group of emerging (market) countries on trend has achieved recognizable progress in its current-account performance. In the context of current-account performance, the world has now achieved more stability than in the latter part of the past century. This is good news.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University