China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

Current account improvements in emerging market countries

February 10, 2025

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

China grew as it wanted in 2024

January 21, 2025

China’s GDP grew on average by 5 percent in 2024 which is in line with planned GDP growth if we express it this way. And it does not appear as a surprise that the final quarter of 2024 showed a slight growth acceleration. Remembering historical experience of previously completely predictable GDP numbers and the obviously ongoing current weaknesses of Chinese growth, it does not feel quite reliable that China officially still succeeded in meeting the official growth target of about 5 percent – despite some stimulation measures.

One may in this context reflect on the introduction of the official release by the National Bureau of Statistics(NBS), making the development of the Chinese economy mainly to an achievement of the political leadership as the following initial lines demonstrate:      “In 2024, in face of the complicated and severe environment with increasing external pressures and internal difficulties, under the strong leadership of the Central Committee of the Communist Party of China (CPC) with Comrade Xi Jinping at its core, all regions and departments strictly implemented the decisions and arrangements made by the CPC Central Committee and the State Council, adhered to the general principle of seeking progress while maintaining stability, fully and faithfully applied the new development philosophy on all fronts, accelerated efforts to foster a new pattern of development, and pursued high-quality development in solid steps. As a result, the national economy was generally stable with steady progress and new achievements were made in high-quality development. Particularly, with a package of incremental policies being timely rolled out, the social confidence was effectively bolstered and the economy recovered remarkably. The major targets and tasks of economic and social development were achieved successfully” (https://www.stats.gov.cn/english/PressRelease/202501/t20250117_1958330.html ).

Without doubt, the political message in this GDP comment can be recognized very easily. There is a lot of political self-praise – but also the realistic comment that the past year has been a very difficult one, both outside and inside China. Additionally, one may wonder how weak the Chinese economy had been performing in reality when – as commented above – the NBS also concludes that the only lately in 2024 implemented growth package meant that “the social confidence was effectively bolstered and the economy recovered remarkably…”.

Of course, Chinese political leaders still – understandably – do not want to publish any growth objective for 2025 when facing that the new U.S. leadership is about to act harshly against China. The announcement of the next growth objective will therefore probably not happen before the National People’s Congress (NPC) which will be opened on March 5, 2025.

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

Why is China’s huge debt neglected?

January 10, 2025

After my recent article from December 19, 2024 on China’s huge private and public debt (https://blogg.lnu.se/china-research/?p=3606), some people asked me why financial markets and considerable parts of the press show such a limited interest in this potential threat to the Chinese and the global economy. The answer to this puzzle is not easy.

Five possible answers

In my view, there are five possible answers to the question above.

First, China’s enormous public and private debt is not regarded as a major threat outside China though it now totally may amount to more than 300 percent of GDP (https://www.caixinglobal.com/2024-01-27/chinas-debt-to-gdp-ratio-climbs-to-record-2878-in-2023-102161022.html).

Second, there may be a general belief that China will be able to tackle the debt problem successfully without getting confronted with distorting debt problems or – even worse – a bursting debt bubble.

Third, China still achieves surpluses in the balance on current account. This means that China by definition does not need to borrow money in foreign currency (though it happens for diversification reasons) – and that therefore pressure from worried foreign financial institutions can be kept down, probably also for the time being.

Fourth, because of China’s very limited (statistical) transparency, circulating debt numbers may be widely considered as unreliable and inappropriate to speculate and write about. Existing sectoral Chinese debt numbers are difficult to handle or even impossible to analyze.

Fifth, China’s debt problem still seems to be interpreted as a long-term issue whereas financial markets usually focus on short-term developments like the PMI or quarterly GDP despite their qualitative shortcomings. Thus, China’s debt challenge may be seen as too far away.

Summary: I would suggest that the first and the fifth alternative may be the most plausible ones – although the other options may serve as partial explanations as well. However, exclusively applying the second alternative could develop into a fatal malign neglect.

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