The increase in growth in services is generating increasing demand for imports but their ability to produce exports to counterbalance that is declining. The result of that is that the current account surplus has almost completely disappeared. The estimates by the IMF is that the surplus this year is 1% of GDP and next year it will be less than 0.7% GDP.
A worse problem is the lack of capital inflow into China. Previously the Chinese economy was developing by migration of particularly US firms into China. And that was because US firms could take their capital, both intellectual and financial, and move to China and set up manufacturing concerns to sell their products back to the US. But this negotiation that Trump has entered into has stopped that process dead.
If you're in a country which is going to have increasing current account problems, you've got to get capital inflow to balance your increasing demand for foreign imports. When you're not getting the migration of capital then you have to go to the World Capital Market. This means you have to open up the Chinese capital market. Now there are endless risks about that for any foreign firm going into that market in terms of the potential domestic instability of the Chinese capital market but I'll talk about that another time.
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Conclusion
So, the bottom line here is that the Chinese are only offering these concessions because they have to. They have to import more grain because they've got a problem with domestic food prices caused from a sudden pork shortage. This must be fixed immediately to avoid any potential political instability.
They also have an increasing problem financing their current account and therefore they need to open up the capital market so they can begin to import capital; neither of those things are because they wanted to, both of them are because they have to.
This article was first published by Morgans.
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