China will likely become more reliant on foreign capital as the country looks set to enter into years of shortfall in its current account, Morgan Stanley predicted in a report.
"The economy's current account is in long-term decline and the future growth of the economy will be increasingly dependent on foreign capital," said the investment bank in a report on Tuesday.
The last time China had a current account deficit was in 1993. A country may need to operate on borrowed means when it runs into a deficit as the total value of goods, services and investments it imports exceeds the total value it exports.
Unlike 1993, however, the investment bank predicts that the shift toward a shortfall might be "sustained," setting the world's second biggest economy on a path to becoming more reliant on foreign capital from 2020 onward.
China's current account surplus has slipped from 10.3 percent of its GDP in the third quarter of 2017, to just 0.4 percent in the third quarter of 2018. This year, the current account deficit could be 0.3 percent of its GDP, and widen to 0.6 percent in 2020, the investment bank predicted.
That pales in comparison to its golden days more than a decade ago, when China had a huge current account surplus of $420 billion, or 9.9 percent of its GDP in 2007.
Demographic shift
The report blamed the shrinking current account on China's aging population, and plateauing market share in goods exports, among other factors.
"We expect China to shift to an annual current account deficit from 2019 onwards due to a slipping national saving rate amid an aging population," said the bank.
A deficit means that a country is spending more than it is getting in income. And if the country's national savings rate is declining, then it would have to attract more foreign capital to fund its needs.
Besides a shrinking share in exports, there has also been rising domestic demand for imported goods and outbound tourism, which has exacerbated the narrowing surplus, according to the report.
Source: CNBC
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