China's savings glut disappears, creating greater balance in the world economy

In a control room at the headquarters of Ctrip, China's largest online travel agency, dozens of fluorescent lines flash every second across a big digital map of the world. Each line represents an international flight sold on Ctrip's platform.

In this century's first decade, Chinese citizens averaged fewer than 30 million trips abroad annually. Last year they made 150 million, roughly one-quarter of which were booked via Ctrip.

That is not just a boon for the world's hotels and gift shops. It is a factor behind a profound shift in the global financial system: the disappearance of China's current-account surplus.

As recently as 2007 that surplus equaled 10 percent of China's GDP, far above what economists normally regard as healthy. It epitomized what Ben Bernanke, then chairman of the Federal Reserve, called a "global saving glut," in which export powerhouses such as China earned cash from other countries and then did not spend it. China's giant surplus was the mirror image of the U.S. deficit. It was the symbol of a world economy out of kilter.

No longer. Last year China's current-account surplus was just 0.4 percent of GDP.

Analysts at Morgan Stanley predict that China could be in a deficit in 2019 — which would be the first annual gap since 1993 — and for years to come. Others, such as the International Monetary Fund, forecast that China will maintain a surplus, though only by the slimmest of margins.

Either way, it would be a sign that the global economy is better balanced than a decade ago. It could also be an impetus for China to modernize its financial system.

At the same time, imports have soared. China's surplus in goods trade in 2018 was the lowest for five years.

The tale of trade in services, especially tourism, is even more striking. When Beijing played host to the Olympic Games in 2008, foreign visitors splashed out a little more in China than Chinese did abroad.

Since then the number of foreign arrivals in China has stagnated, while Chinese outbound trips have surged. And Chinese travelers have proved to be big spenders. In 2018, China ran a $240 billion deficit in tourism, its biggest yet.

Some of the current-account fluctuations are cyclical. Chen Long of Gavekal Dragonomics, a research firm, notes that the price of oil and semiconductors, two of China's biggest imports, was high last year. If they come down, a current-account surplus could swell up again.

Yet deeper forces are also at work. At bottom, a country's current-account balance is simply the gap between its savings and its investment. China's investment rate has stayed at a lofty 40 percent or so of GDP. But its savings rate has fallen to about the same, from 50 percent of GDP a decade ago, as its people spend more.

There is, nevertheless, some concern about the implications. In emerging markets, big current-account deficits can be a warning sign of financial instability, indicating that countries are living beyond their means. But China is in no such danger. Any deficit is expected to be small, as a fraction of GDP, in the coming years. What is more, the government still has a fat buffer of $3 trillion in foreign-exchange reserves. That should buy it time.

The critical question is how China uses this time. By definition any country that runs a current-account deficit needs to finance it with cash from abroad. In an economy with a wide-open capital account and a freely floating currency, inflows and outflows balance without the central bank giving it much thought. But in China the government keeps a tight grip on both its capital account and its exchange rate.

So now that it is facing the prospect of current-account deficits, it has little choice but to relax its grip, in order to bring in more foreign funding. It is moving in that direction.

These moves, though incremental, have been enough in aggregate to persuade compilers of leading stock and bond indexes, important benchmarks for global investors, to bring Chinese assets into their fold. The IMF argues that more active investing in bonds would support the government's goal of using interest rates as a bigger weapon in its monetary-policy arsenal (instead of old-fashioned administrative guidance). With a more flexible exchange rate to boot, China would end up with a more modern, efficient financial system.

But there are clear limits to how far China is willing to go. Efforts to lure foreign investors have not been matched by moves to make it easier for its citizens to invest abroad.