• Ernie Diaz

The Way of Deficit

You can always tell noob economists by their imagining there is such a thing as a “solution”. “Yay!” they’ll say. “Biden’s gonna pump two trillion into infrastructure – recession solved!”

True economic policy is the search for balance, however precarious. That often means choosing between the lesser of two evils. In the choice between yuan appreciation and running a deficit, China has chosen the latter, for the first time since 2016. True, it was a paltry $78b, when initial estimates thought it would be twice as much.

“This shows that China’s private sector continues to accumulate overseas assets,” says Edward Lehman. “There’s plenty of investment in overseas securities, which shows a strong urge to diversify. It’s a good signal for foreign financial companies looking to deepen and expand their footprint in China.”

The account deficit also covers ownership of foreign assets, and foreign ownership of domestic assets. However, the deficit is significantly smaller than 2016’s – which was $416b.

“The most important factor for the government is that these outflows are relatively orderly, which they appear to be,” says Lehman.

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