China's Continued Failure to Rebalance Growth Threatens Global Economic Stability

China announced yesterday (Wednesday) that its trade surplus grew 60.7% in October from the month before as efforts to rebalance its economic growth this year have failed. Furthermore, recent policy tightening measures mean domestic demand is unlikely to pick up in the near future.

"The rebalancing of China's economy has an awfully long way to go – in fact it's hardly even got started," Mark Williams, an economist at Capital Economics Ltd. who previously worked at the U.K. Treasury as an adviser to China, told Bloomberg. "In normal circumstances, the world might be willing to wait, but not when the likes of the U.S. are struggling with very high unemployment."

In a sign China's export-driven growth has not shifted to an increase in domestic consumption, China's trade surplus hit $27.15 billion last month, up from $16.9 billion in September.  Exports rose 22.9% in October from the year before and imports climbed 25.3%. The trade surplus was slightly higher than expectations of $26.4 billion, according to a poll reported by Dow Jones Newswires.

A report by the World Bank released last week said large trade surpluses in some countries, including China, paired with large account deficits in developed economies like the United States would remain a huge risk to global growth.

"In this connection, a lack of success in rebalancing China's growth pattern would be among the more serious medium-term risks, for China and the world economy," the report said.

China's central bank announced Wednesday yet another measure to ease inflationary pressures. It lifted banks' reserve ratio requirements by 0.5 percentage point, limiting the amount of money lenders can spare, effective Nov. 16. This put the standard ratio for large banks at 17.5%, although the central bank can alter rates for individual banks.

The reserve requirement move came a month after China's central bank raised interest rates and economists expect another rate increase before year-end. China's central bank raised rates three times earlier this year, but stopped in May under expectations of a sharp fall in global economic recovery. China's economic growth evened out, but economists think it has again picked up its pace in recent months, causing the government to adjust economic policy.

"[W]ith overheating pressures in the domestic economy rising quickly, further policy tightening is likely," Goldman Sachs Group Inc. (NYSE: GS) analyst Yu Song wrote in a note. "This will tend to depress domestic demand growth and import growth and the underlying trade surplus may be at risk at widening again."

The continued policy changes mean an increase in Chinese consumption is unlikely to take hold any time soon, frustrating China's trade partners who are also looking to increase exports.

"Beijing's policy focus has shifted decisively from concerns about domestic growth and external demand to concerns about inflation pressures and liquidity management," Brian Jackson, an economist at Royal Bank of Canada (NYSE: RY), told The Wall Street Journal.

Economists expect China's inflationary concerns to heighten Thursday when consumer price index numbers are released. Experts expect the CPI to be up 4% from a year earlier, higher than China's 3% target.

China also has attempted to alleviate concerns over a real-estate bubble, but so far its adopted policies have done little to stop growth. Property prices were up 0.2% in October from the previous month, after climbing only 0.5% in September, shown in data reported Wednesday. Real estate sales also gained after falling for a few months earlier this year.

China's policy tightening measures are also offshoots of concern over the U.S. Federal Reserve pumping more liquidity into the economy through its quantitative easing policy. China's central bank governor Zhou Xiaochuan said last week he's concerned the Fed's policy will boost capital inflows to China, complicating its economy.

"There is worry in emerging economies that quantitative easing will result in substantial hot-money inflows," Mitul Kotecha, head of global currency strategy at Credit Agricole CIB in Hong Kong, told Bloomberg. "They see this as difficult to control. With the run-up in asset prices, it is understandable where this concern is coming from."

While the United States will face criticism from foreign policy makers regarding its stimulus measures at this week's Group of 20 (G20) summit, China's latest trade numbers are likely to spark increased pressure on the country to change its currency policy. 

"This large trade surplus will likely add to global pressure for China to allow more currency appreciation," said Royal Bank of Canada's Jackson. 

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