MBR_ISSUE 51_MAY_low res-compressed (1)

Malta Business Review
FOCUS: CHINA
China’s looming current account deficit
will have consequences for us all
Investors need to mitigate the risks
of China’s looming current account
deficit, coming at a time of ballooning
U.S. budget deficits.
This is the warning from a Senior
International Investment Strategist at
one of the world’s largest independent
financial advisory organisations. The stark
observation from deVere Group’s Tom
Elliott comes as the escalating trade war
between the U.S. and China – the world’s
two largest economies -threatens to curb
Chinese exports, accelerating the Asian
powerhouse’s lurch towards a current
account deficit. He explains: “China has
spent the last two decades turning its trade
surplus into purchases of overseas assets,
from U.S. Treasuries to London property.
“But China is changing. Its current account
is about to turn negative, meaning its
economy will be increasingly dependent
on foreign capital to continue growing. This
has potentially far-reaching implications,
not just for China, but for the U.S. and the
rest of the world. The 25% tariff imposed
by the U.S. on $500 bn worth of Chinese
imports will accelerate this trend.”
He continues: “As China stops being a large
buyer of U.S. Treasuries, America’s budget
deficit is ballooning and will be just short of
$1 trillion this fiscal year. The combination
is negative for U.S. Treasuries, and may
help drive up U.S. and global bond yields.”
“Investors around the world may see
higher global borrowing rates, from car
loans to mortgages, because of the end of
the Chinese savings glut. This could trigger
a global economic downturn. The two main
drivers of this change both reflect the fact
that China has become wealthier, and that
a growing middle class has cash to spend.”
“First, the growth in the export of goods
has not kept pace with the growth of
consumer imports. China’s deficit in
traded goods with Japan and South Korea
has grown.
“Second, a huge increase in Chinese
tourism abroad has occurred over the last
decade which has increased the persistent
deficit in services. In 2018, Chinese visitors
spent $240 billion more abroad than
foreign visitors spent in China, thanks in
part to their lavish spending habits. In
2017 Harrods, the London department
store, reported that mainland Chinese
overtook British customers as the largest
customer group.
“Domestically, the Chinese authorities have
responded to the change in the current
account by opening China’s capital markets
to foreign investors, to help boost inflows
of foreign capital.” deVere’s International
Investment Strategist concludes: “China’s
- and therefore the world’s – economy is
changing. Mr Elliott goes on to say: “But
remember, wherever there is disruption
there will be winners.”
“As such, investors should remain
diversified, geographically and by asset
class - that’s to say, maintaining exposure
to equities and bonds, from as many
different issuers as possible - in order to
protect their savings from this uncertainty
and capitalise on the opportunities that
will inevitably present themselves. MBR
e: george@priorconsultancy.co.uk
t: +44 207 1220 925
Twitter: @PriorConsults
Editor’s Note:
deVere Group is one of the world’s
largest independent advisors of
specialist global financial solutions
to international, local mass affluent,
and high-net-worth clients. It
has a network of more than 70
offices across the world, over
80,000 clients and $12bn under
advisement.
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