How will a contraction in China’s trade surplus affect the economy?
Special points to highlight in this report:
- As always, October data was mixed. While consumption growth may be picking up, it is still not enough to keep pace with slowing growth in production. The result was more CPI deflation and one of the biggest monthly trade surpluses in history.
- One of the biggest questions in China is how—and how quickly—the incoming Trump administration will move to correct US trade imbalances This will be easier said than done, but to the extent that Washington is able to reduce US trade deficits, this will put pressure on China as it will most likely result in downward pressure on its trade surplus.
- To the extent that there is a forced contraction in the Chinese trade surplus, Beijing will have to choose between rising unemployment, a structural transformation of the domestic distribution of income, a supply-side stimulus, and a demand-side stimulus. Because it will do all it can to avoid the first of these options, and it is struggling to manage the second, in effect the choice for China is how to direct future stimulus spending programs.
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