Daily Management Review

Morgan Stanley Predicts Need For More Foreign Capital For China From 2020


02/13/2019




Banker Morgan Stanley believes that the China's economy is on a path of "long-term decline" and would require more of foreign capital for growth starting from 2020.
 
According to a report prepared by Morgan Stanley, as China is all set to move in a period where it would have shortfall in its current account, the economy would require more of foreign  capital to keep its economy on track.
 
"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.  
 
It was way back in 1993 that there was any current account deficit in China. A current account deficit happens when the total exports of a country is less than the total value of imports including goods, services and investments and in such situations countries need to function on money that is borrowed from outside sources.
 
But the difference in the predicted situation in the future compared to the one in 1993 is that this time, the shortfall in current accounts would be a sustained one and therefore the second largest economy of the world would have to be more dependent on foreign investments and capital starting 2020 to keep running.
 
In the third quarter of 2017, China had a current account surplus of 10.3 per cent of its GDP, which slipped to just about 0.4 per cent of its GDP in the third quarter of 2018. In the current year, the report predicted that the current account deficit could be 0.3 per cent of its GDP and would further increase to about 0.6 per cent of its GDP by 2020, predicted the report from Morgan Stanley.
 
That is a sorry picture for an economy that had a current account surplus of about $420 billion, or 9.9 per cent of its GDP just about a decade ago in 2007.
 
The plateauing of market share in goods exports and an aging population, among others, have been blamed for the shortfall in the current account deficit of China.
 
"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 in a current account signifies that the amount spent by a country is more than its earnings. And there would be need for attracting more foreign capital if there is a decline in the national savings rate of the country.
 
In recent years, there has been more demand for imported goods in China and outbound tourism which has increased the deficit aided by a drop in exports, the report stated. And to exacerbate things further, there is a general slowdown in the Chinese economy. According to official government figures of China, the rate of growth last year was 6.6 per cent which was the slowest for the Chinese economy in the last 28 years.
 
According to the Morgan Stanley report, every year between 2019 and 2030, there would be requirement of at least $210 billion of net foreign capital inflows by China so that it could fill the gap in the current account.
 
"This means that China will need to improve its business environment further and attract (foreign direct investment) inflows, accelerate opening up of the domestic equity and bond markets, and promote RMB's status as an international reserve currency," it said, referring to another name for the Chinese yuan.
 
(Source:www.cnbc.com)






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