3.5.11 20:28China's current-account surplus: Incredibly Misleading Forecasts? | The Economist
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Apr 28th 2011 | from the print edition
from the print edition | Finance and Economics
China's current-account surplus
Incredibly Misleading Forecasts?
How not to predict one of the world’s most sensitive numbers
THE leaves of the compass plant always point north. The
International Monetary Fund has developed a similar trait. Over
the past four years, in successive editions of its “World
Economic Outlook”, the fund has forecast that China’s currentaccount
surplus would widen over the next five years, or at
least remain constant. Instead the surplus has consistently
fallen, from 10.6% of GDP in 2007 to 5.2% last year (see
chart). Undeterred, in its latest forecast the IMF says that
China’s surplus will rise to 6.8% of GDP in 2013 and almost 8%
by 2016.
The decline in China’s surplus is partly due to the slump in its
exports caused by the unexpectedly deep recession in rich
economies. Could this explain the IMF’s overshooting? Not really: the IMF was wider of the
mark than most forecasters. In April 2009, when it predicted a surplus of 9.3% of GDP for
2010, the average forecast of five investment banks was 6% of GDP.
The IMF may have been too pessimistic about growth in China’s domestic demand (and hence
its imports), but a bigger problem is the exchange rate it uses. The fund always assumes that
real trade-weighted exchange rates remain constant, and because China has higher inflation
than America this has often implied a depreciation in its nominal exchange rate. (The IMF
does not actually spell out its forecast for the yuan but this can be calculated by dividing GDP
in yuan terms by dollar GDP.) For example, its latest forecast implicitly assumes that the
yuan will weaken to an average rate of 7.04 to the dollar in 2013 from a current rate of 6.53.
Most forecasters assume a further appreciation against the dollar. Paul Cavey at Macquarie
has pencilled in a rate of 5.8 yuan to the dollar for 2013, for example, when he expects the
current-account surplus to be 3.6% of GDP.
Since 2007 the yuan’s real trade-weighted value has not been constant, as the IMF always
assumes, but has risen by 15-20%, helping to trim China’s surplus. A forecast which assumes
that the yuan steadily depreciates against the dollar seems unrealistic. Yet by predicting a
widening current-account surplus in China, the IMF provides respected fodder for
protectionists who want to slap tariffs on Chinese goods. The fund badly needs a new
compass.