One of the biggest imbalances in the global economy could soon be a thing of the past: China's super-sized trade surplus is melting away.
But don't get too excited.
In light of the savings glut theory that China's export of its excess savings helped to drive down interest rates in the West and fuel over-consumption, especially in the United States, the fast-falling surplus should help to put the world economy on a steadier footing.
This supports our view that global rebalancing is occurring amid weakening developed market growth and robust Chinese demand, economists at Barclays Capital in Hong Kong said in a report.
They were commenting on figures released on Tuesday showing that the surplus shrank to $155 billion last year from $183 billion in 2010.
As a share of gross domestic product, the surplus shriveled to 2.1 percent in 2011 from 3.1 percent in 2010 and a high of 7.3 percent in 2007.
For 2012, Jacqueline Rong at BNP Paribas in Beijing expects the surplus to drop further to 1.2 percent of GDP. In dollar terms, Daiwa Securities has penciled in a surplus this year of $118 billion and Mizuho is forecasting $113 billion.
Ting Lu at Bank of America Merrill Lynch in Hong Kong reckons the 2012 surplus could be as low as $41 billion -- a rounding error next to the record high of $296 billion in 2008 that triggered demands from Washington that Beijing let the yuan rise faster or risk the wrath of Congress.
Indeed, some economists believe China's trade will be in the red before too long. If that sounds implausible, Japan last year is likely to have chalked up its first trade deficit since 1963, according to JP Morgan.
Mark Williams with London consultancy Capital Economics said it was positive for global rebalancing that China, with its declining surplus, was a source of net demand for the rest of the world.
But he fretted that the 24.9 percent increase in Chinese imports last year had been geared to ramping up already-strong investment, raising the question of who would buy the extra goods to be churned out by newly built factories.
Short of an unlikely boom in domestic consumption, Williams said he feared one of two unpleasant outcomes.
One option is that China does everything it can to gain market share. So it slows the appreciation of the renminbi and continues to offer very cheap credit to Chinese firms to enable them to undercut foreign producers, and so on. That route leads to protectionism, he said.
The alternative is that China accepts that it needs to go through a pretty wrenching process of structural adjustments which will involve a lot of companies going bankrupt, he added.
Uri Dadush, an economist with the Carnegie Endowment in Washington, said he was less concerned about ballooning factory capacity.
A lot of the investment in China is going into infrastructure and building a domestic service economy. It isn't all going into exportables and manufactures by any stretch of the imagination, Dadush, a former World Bank official, said.
Moreover, the dwindling of China's surplus should serve to put the spotlight on countries with truly outlandish surpluses -- including Germany, the Netherlands, Switzerland and Sweden.
But Dadush agreed that the Chinese figures were far from unambiguously good news -- even if they did point to resilient domestic demand.
The fact that Chinese exports may not have performed as well as expected in recent months is in part a reflection of the very large slowdown we have seen in the United States and Europe, Dadush said.
And there's the rub: economists see no end to the headwinds that slowed global growth in 2011 as Western governments struggle with excessive deficits and debt burdens.
JP Morgan economists calculate that the gross public liabilities of advanced economies have surged by more than 30 percentage points of GDP since 2006 and now stand well above the level some deem as harmful to growth and debt sustainability.
Despite the widespread fiscal tightening that will be taking place through the developed markets, debt as a percent of GDP will still be on an upward path in the U.S., the euro area, Japan, and the UK, they said in a report.
For mature economies as a whole, governments' net lending positions - the budget balance - by the end of this year will still fall 5 percentage points of GDP short of stabilizing debt as a share of GDP, the bank estimates.
Hence the fierce embrace of austerity and the resulting hit to growth: the central bank of Portugal said on Tuesday that belt-tightening mandated as the price of an international bailout would cause the euro zone member's economy to shrink 3.1 percent this year.
In short, China's trade surplus may be fading, but only to be displaced by other imbalances that are the legacy of past excesses and policy mistakes.
Fiscal consolidation will no doubt weigh heavily on economic activity in the developed markets in the coming years, and thus on the global economy as well, JP Morgan said.
(editing by Ron Askew)