International Monetary Fund Managing Director Christine Lagarde confirmed Thursday that the Fund will cut its estimate of China's current-account surplus in a new global economic outlook next week.
This is a bid deal. (Ok, a biggish deal.)
The current account is the difference between the value of exports and imports, earnings on international investments and payments made to foreign investors, and cash transfers. It is at the core of the debate over global imbalances, the Group of 20's shorthand for excessive trade surpluses in Asia and Germany and equally boated trade shortfalls in the United States.
In 2007, China had a current-account surplus equal to 10 per cent of gross domestic product. This was unheard of, and served as strong evidence the country was suppressing the value of its currency to drive exports. (The U.S. was running a similarly large current-account deficit.)
China's surplus has narrowed over the financial crisis, in large part because global demand for its products has declined. But the government also has allowed the value of its currency to rise over the last year or so. The surplus was 2.7 per cent of GDP last year.
The IMF has been unconvinced the contraction will last. Its current estimate is the current-account surplus will expand to 7 per cent in 2015. The reason: as the global economy rebounds, exports will pick up faster than imports. The U.S., the IMF and others say China still keeps too tight a tether on its currency, and has done too little boost domestic demand.
But the fund is now acknowledging that the shift in China's current-account surplus could be more structural than it had assumed. Ms. Lagarde told an audience in Washington Thursday that the IMF's medium-term forecast for China's current-account surplus is now between 4 and 5 per cent.
"It's progress," she said.
A narrower current-account surplus will make it harder for China's critics to say its policies are endangering global economic stability. Harder, but not impossible.
Ms. Lagarde acknowledged that China is exporting less, and relying more on domestic demand for economic growth. However, that domestic growth is being driven by investment. Chinese consumers still aren't spending as much money as many think they could – in part because their currency is too weak. Unless Chinese demand strengthens, advanced economies will struggle to get back on their feet because they are desperate for some income from exports.
"There is more to be done," Ms. Lagarde said of China.