IMF says worries that China's external surpluses result from industrial policies are 'incomplete'

Worries that China's external surpluses result from industrial policies reflect "an incomplete view," and trade balances in China and the United States are primarily driven by domestic macro forces, the International Monetary Fund said in a new analysis.

"External balances are ultimately determined by macroeconomic fundamentals, while the link to trade and industrial policy is more tenuous," four IMF economists, led by IMF Chief Economist Pierre-Olivier Gourinchas, wrote in a blog published Thursday.

"China's subsidies are concentrated in priority sectors such as software, automobiles, transportation, semiconductors, and more recently, green technology. Yet, the country's manufacturing trade surplus is not concentrated among any specific industries and the share of the major sectoral contributors has remained fairly stable over time," the IMF economists noted.

Compared with the 2000s, China now accounts for a substantially larger share of the global economy, so much so that even though its trade surplus is smaller relative to its economy, it has remained relatively stable over time as a share of global output. "Hence spillovers from trade developments in China continue to be quite sizable for the rest of the world," they said.

The latest analysis-stylized simulations using the IMF's Group of Twenty model illustrate that macroeconomic factors have driven China's rising trade surplus since the COVID-19 pandemic.

"These include negative domestic demand shocks in China, due to the property market downturn and low household confidence, as well as a dissaving shock in the United States due to elevated government and personal spending," said the economists.

They argued that "homegrown surpluses and deficits call for homegrown solutions" that require setting the macro dials appropriately, adding that sustained growth in China will come from addressing long-standing domestic imbalances.