China surplus and US deficit

Brad Setser has his usual insightful commentary on China's trade surplus and growing reserves.

China indicated its reserves have increased to $711 billion at the end of June -- up $101 billion from the end of December 2004. Actually, they are up more than that. China transferred $15 billion to a state bank, and valuation losses from the falling euro and yen probably subtracted another $15 billion to its reserves (that would be roughly consistent with a 75/25% dollar/ non-dollar spit in China's reserves). That implies an underlying increase of $130 billion, give or take a few billion, in the first half of the year -- a bit over $20 billion a month.

And he thinks that China's rapid pace of reserve accumulation will continue in the second half of the year.

China's official GDP will be a bit under $2 trillion, say $1850 billion, at the end of 2005. I think there is a reasonable chance China will add $280 billion or more to its reserves this year -- or 15% of its GDP... China's reserve accumulation seems every bit as unprecedented [as] current account deficits of close to 7% of GDP in the world's largest economy, and the issuer of the world's reserve currency.

The latter is, of course, referring to the US and its current account deficit. Setser suggests that the pace of Chinese surpluses is problematic. So, for that matter, is the US current account deficit.

The factors behind the US current account deficit and the possibility that it may stabilise as the economy moderates are discussed in my commentary "US current account deficit may stabilise as economic growth moderates".