The notion that China is flooding the world with
excess industrial capacity is usually based on its massive surplus in goods trade, now standing at
nearly US$1.2 trillion. That number is real, but treating it as proof of systemic overcapacity is not entirely correct.
Goods trade is only one slice of China’s external balance, and it is increasingly offset by large outflows such as import of services and investment income payments.
Moreover, China’s total current account surplus is US$657 billion or 3.4 per cent of gross domestic product (GDP). Having a much smaller current account surplus means China effectively runs a huge services and income account deficit. The country is a major importer of foreign services, ranging from transport to financial services.
Many Chinese households
spend their money abroad and Chinese firms rely on foreign logistics, insurance, licensing and know-how to operate or produce goods and services. All these have resulted in a persistent and sizeable services trade deficit – roughly US$200 billion a year that offsets part of the goods surplus.
Then there is investment income. China pays substantial amounts of profits, dividends and interest incomes to
foreign investors who own factories, subsidiaries and equity stakes inside the country. Those payments, now at about US$150 billion, reflect decades of inward foreign direct investment that has helped build China’s industrial base in the first place. A significant share of what looks like “Chinese” export income ultimately accrues to foreign capital owners.
This matters because overcapacity is a macroeconomic concept, not a sectoral talking point. A country that exports manufactured goods but imports services and pays income abroad is not simply dumping excess output on the rest of the world. It is engaging in a more complex exchange in which incomes associated with production are partly recycled back to the world economy through service imports and capital income repatriations.
Moreover, the composition of China’s external balance also reveals something more fundamental. China is a manufacturing powerhouse, but it is not yet a global rentier economy. Unlike the United States or Japan that earn higher net incomes from overseas investments, China’s external assets are concentrated in
low-yield reserves. Meanwhile, foreign investors earn equity-like returns in China. The return asymmetry ensures that income flows will continue to leave the country, capping its overall external balance of payments surplus.
South China Morning Post
