China's current account surplus set to continue falling, Oxford Economics says

China´s current account surplus was set to halve over the medium-term, reducing political pressures on Beijing, but also eating into its ability to withstand financial turmoil, a think-tank said.

Asia´s largest economy would see its surplus reduce by half by 2020, reaching 1.0% of gross domestic product by that year, Oxford Economics said, which was well below the 9.9% of gross domestic product reached in 2007 or the $210.0bn (1.9% of GDP) seen in 2016.

The foreign trade surplus, which was typically the main balance of the current account, would fall as export growth slowed and imports of services rose, Louis Kujis and Alessandro Theiss said in a research report sent to clients.

Nonetheless, stronger goods imports were projected thanks to higher demand from partner countries together with weakness in the country´s exchange rate.

Trade in services on the other hand clocked in with a deficit of $242.0bn in 2016, in large part due to Chinese tourists' greater spending relative to that by foreigners visiting the Middle Kingdom.

"This illustrates how far China has come in increasing household spending power – the average deficit was US$ 3.7 bn between 2000-2007. We expect the trade deficit to continue to widen, although the pace of deterioration should moderate. We also see further downward pressure on the CA surplus from weakening terms of trade," Kujis and Theiss said.

Indeed, under certain assumptions the current account surplus might eliminate the surplus altogether, they said.

In turn, a lower current account balance meant Beijing would enjoy a smaller cushion against capital outflows, which might require more forceful measures against outflows.

"Moreover, the – unlikely but possible – scenario of a CA deficit would also increase the vulnerability to a financial crisis amid rising debt."