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Causes of and Remedies for the People’s Republic of China’s External Imbalances : The Role of Factor Market Distortion

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  • Yiping Huang

    (Asian Development Bank Institute (ADBI))

  • Kunyu Tao

Abstract

The current account surplus of the People’s Republic of China (PRC) has drawn much foreign and domestic attention. This paper focuses on the reasons and remedies for the PRC’s current account surpluses. Rather than deploying the standard explanations, we argue that asymmetric market liberalization and the related factor market distortion is the root reason for the PRC’s external imbalances. These cost distortions have artificially lowered PRC production costs, raised profits, and improved their products’ international competitiveness which has not only stimulated the economy, but also brought about severe structural risks. We completed a crude estimation for factor cost distortions in the PRC during 2000–2009 which matched its current account surpluses quite well. In order to rebalance the economy, we recommend that the PRC should adopt a comprehensive reform package focusing on removing the factor market distortions.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 23257.

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Date of creation: Apr 2011
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Handle: RePEc:eab:financ:23257

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Keywords: External Imbalances; PRC; Factor Market Distortion; current account surpluses; asymmetric market liberalization;

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Cited by:
  1. Philip Levy, 2011. "The United States and the PRC : Macroeconomic Imbalances and Economic Diplomacy," Governance Working Papers 23208, East Asian Bureau of Economic Research.
  2. Ettore Dorrucci & Gabor Pula & Daniel Santabárbara, 2013. "China’s economic growth and rebalancing," Banco de Espa�a Occasional Papers 1301, Banco de Espa�a.

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