China is running a current account deficit, indicates China buys more from the rest of the world than the world buys from it.



China, which built its success as a mercantilist export engine, would need to morph into being a global consumer like the US. That would require a huge shift in the structure of the whole economy away from investment and exports and towards consumption. As we know, that is much easier said than done; and such as shift is also hampered by China's relatively low GDP per capita, says Rabobank.



More specifically today, would anyone want to hold CNY government bonds knowing how the government intervenes in markets? Consider that local Chinese government bond issues have just been forcibly rolled over at new artificially low interest rates; even Chinese banks did not want to buy them without a PBOC pledge of support to immediately repo them for new cash loans, states Rabobank. Of course, central government bonds might be a different story (and they were yielding an attractive 3.55% at the 10-year maturity at the time of writing).



"However, another key fundamental question is: would China allow foreigners leverage over its state finances? That seems politically very unlikely, especially as it would also mean China would have to liberalize its capital account to allow money to enter and leave the country freely: as we have explored in past specials, that would run the risk of serious financial instability, with more capital likely opting to leave China than would come in at present", added Rabobank.