By: Abhinav Arumilli
Trade Deficit
The U.S trade deficit has fallen to an 8 month low as a 28% drop in the deficit between the U.S and China has taken place according to a report by the Hill on April 17th 2019 by Sylvan Lane. Lane continues, citing federal data released, that our overall trade deficit has fallen to 3.4%.
However, this deficit reduction due to the trade war is having numerous negative impacts on the U.S economy as a whole. A recent report by AEM, Association of Equipment Manufacturers, has concluded that putting tariffs has led to a $29B reduction in GDP. In addition, according to famous libertarian economist Milton Friedman, deficits in the long run does not matter as it leads to increased foreign investments. The U.S as a country has also continuously grown even through large deficits which it has had for most of its history.
China, on the other hand, has developed much of its recent wealth due to favorable trade deficits. An article by Micheal Baltensperger, explains the recent changes in the deficits.
The IMF’s spring edition of the World Economic Outlook projects the Chinese current account balance to be around 0.5% of GDP in 2019, enter negative territory in 2022, and stand at minus 0.2% by 2024. But during the last 15 years, the current account balance of China, the world’s manufacturing powerhouse, has been consistently positive and before the great financial crisis as high as 10% of GDP in 2007.
A report by Morgan Stanley, an investment bank, argues that such projections are too conservative as China’s current account will already be negative for 2019 and grow in the coming decade to reach 1.6% of GDP by 2030.
http://bruegel.org/2019/04/why-chinas-current-account-balance-approaches-zero/
As China’s economy, currently is dependent on positive trade deficits as these deficits go negative China will have to transform its economy from an exporter to an importer. Essentially, as China’s deficit goes negative it must shift, as all major economies do, to having an economy based on consumption as America’s is currently.
China’s Main State Pension, and why it matters
China’s main state pension fund will run dry by 2035 due to its shrinking working population, government researchers have found.
The findings offer a glimpse of a looming demographic crisis, exacerbated by decades of population control policies, that is expected to hit the world’s second-biggest economy in all corners of society.
This exerpt by Frank Tang, shows the massive problems heading towards China. While China recently reported 6.4% growth, above projections of 6.3% growth, thier economy needs to be able to grow at a much higher rate to try to support the increasing senior citizen class with a labor force that is shrinking continously as mentioned in the exerpt. Couple this with the current debt problem China has and the trade war between America and China discussed above, and China’s future suddenly does not look as pretty.
Gold
China’s on a bullion-buying spree as Asia’s top economy expanded its gold reserves for a fourth straight month, adding to investors’ optimism that central banks from around the world will press on with a drive to build up holdings. Prices advanced back toward $1,300 an ounce.
https://www.bloomberg.com/news/articles/2019-04-07/china-continues-gold-buying-spree-as-pboc-adds-for-fourth-month
The People’s Bank of China raised reserves to 60.62 million ounces in March from 60.26 million a month earlier, according to data on its website on Sunday.
The excerpt above by Ranjeetha Pakiam has important ramifications, as China shifting to buying more gold impacts the rest of the global economy. China, by buying gold is giving 2 major signals for investors across the world. Firstly, an increased move away from the U.S and secondly it shows China’s lack of faith in the dollar and perhaps expectations of an economic slump for the U.S or the global market as a whole.
Econ Ramblings 