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Causes and Remedies of China’s External Imbalances

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Author Info

  • Huang Yiping

    (China Center for Economic Research)

  • Tao Kunyu

Abstract

Chinas large current account surpluses not only destabilize its macroeconomic conditions but also are also at the center of global rebalancing. The literature offered five explanations for such surpluses, most of which are important but fail to account for the recent surge and/or offer actionable policy responses. In this study, we propose an alternative hypothesis for Chinas large current account surpluses : asymmetric market liberalization and associated cost distortions. This unique reform approach was the fundamental cause of both extraordinary growth performance and growing structural imbalances during the reform period. Indeed, estimates of cost distortions provide good fits of the current account. Estimated cost distortions rose after 2004 but peaked in 2006 at 12.2 percent of GDP. The worst of the external imbalance problem may be already behind us. We argue that, for rebalancing its economy, China needs a comprehensive package focusing on further liberalization of factor markets. Exchange rate policy should be an important part, but exclusive focus on the currency could be counterproductive.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22723.

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Date of creation: Jan 2010
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Handle: RePEc:eab:macroe:22723

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Related research

Keywords: China; current account surplus; imbalance; exchange rate; asymmetric market liberalization; cost distortion;

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Cited by:
  1. Ramkishen S. Rajan & Javier Beverinotti, 2012. "The real exchange rate, sectoral allocation and development in China and East Asia: A simple exposition," Journal of International Development, John Wiley & Sons, Ltd., vol. 24(4), pages 401-414, 05.
  2. Ramkishen S. Rajan, 2011. "Management of Exchange Rate Regimes in Emerging Asia," Governance Working Papers 23214, East Asian Bureau of Economic Research.

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