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China’s Macroeconomic Imbalances: Causes and Consequences

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  • Knight, John

    ()
    (BOFIT)

  • Wang, Wei

    (BOFIT)

Abstract

In recent years China has experienced two forms of extreme macroeconomic imbalance: an expenditure imbalance in the sense of very high investment and very low consumption, giving rise to rapid capital accumulation; and an imbalance between expenditure and production, producing external imbalance, i.e. a huge surplus on the current account of the balance of payments. Both imbalances imply a low rate of time discount by both government and society: consumption in the present is forgone in favour of consumption in the future. The paper examines how these imbalances came about, and goes on to consider whether they can be sustained and how they might be redressed. There is no evidence that the rapid capital accumulation has reduced the rate of profit on capital and thus the incentive to invest. However, persistent external imbalance poses a threat to investment if it generates excess liquidity and asset bubbles. The current account surplus rose remarkably in the years 2004-7. This was associated with exogenous increases in competiveness and in saving, both attributable to the economic reform policies. On current policies, the surplus is likely to rise again once the world economy recovers from its recession. This poses three sorts of problems, each of which is examined in turn: difficulties for macroeconomic stabilization policies; risk of capital loss on the foreign exchange holdings; and the threat of retaliation by China's trading partners. A combination of internal and external policies will be required to redress the imbalance.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 15/2011.

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Length: 54 pages
Date of creation: 21 Jun 2011
Date of revision:
Handle: RePEc:hhs:bofitp:2011_015

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Keywords: China; investment; consumption; current account; exchange rate; external imbalance; macroeconomic imbalance;

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References

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  1. Alessandra Guariglia & Xiaoxuan Liu & Lina Song, . "Internal Finance and Growth: Microeconometric Evidence on Chinese Firms," Discussion Papers 08/37, University of Nottingham, GEP.
  2. Chamon, Marcos & Prasad, Eswar, 2007. "Why Are Saving Rates of Urban Households in China Rising?," IZA Discussion Papers 3191, Institute for the Study of Labor (IZA).
  3. John Knight & Sai Ding, 2008. "Why has China Grown so Fast? The Role of Structural Change," Economics Series Working Papers 415, University of Oxford, Department of Economics.
  4. Chong-En Bai & Chang-Tai Hsieh & Yingyi Qian, 2006. "The Return to Capital in China," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(2), pages 61-102.
  5. Robert Koopman & Zhi Wang & Shang-Jin Wei, 2008. "How Much of Chinese Exports is Really Made In China? Assessing Domestic Value-Added When Processing Trade is Pervasive," NBER Working Papers 14109, National Bureau of Economic Research, Inc.
  6. Sai Ding & John Knight, 2008. "Why has China Grown So Fast? The Role of Physical and Human Capital Formation," Economics Series Working Papers 414, University of Oxford, Department of Economics.
  7. Prema-chandra Athukorala, 2007. "The Rise of China and East Asian Export Performance: Is the Crowding-out Fear Warranted?," Departmental Working Papers 2007-10, The Australian National University, Arndt-Corden Department of Economics.
  8. Anthony J. Makin, 2007. "Does China's Huge External Surplus Imply an Undervalued Renminbi?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 15(3), pages 89-102.
  9. John Knight & Sai Ding, 2009. "Why does China invest so much?," Economics Series Working Papers 441, University of Oxford, Department of Economics.
  10. de la Grandville,Olivier, 2009. "Economic Growth," Cambridge Books, Cambridge University Press, number 9780521725200.
  11. Ding, Sai & Knight, John, 2009. "Can the augmented Solow model explain China's remarkable economic growth? A cross-country panel data analysis," Journal of Comparative Economics, Elsevier, vol. 37(3), pages 432-452, September.
  12. Shang-Jin Wei & Xiaobo Zhang, 2009. "The Competitive Saving Motive: Evidence from Rising Sex Ratios and Savings Rates in China," NBER Working Papers 15093, National Bureau of Economic Research, Inc.
  13. de la Grandville,Olivier, 2009. "Economic Growth," Cambridge Books, Cambridge University Press, number 9780521898010.
  14. Ronald McKinnon & Gunther Schnabl, 2009. "The Case for Stabilizing China's Exchange Rate: Setting the Stage for Fiscal Expansion," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 17(1), pages 1-32.
  15. Xinhua He & Yongfu Cao, 2007. "Understanding High Saving Rate in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 15(1), pages 1-13.
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Cited by:
  1. Prema-chandra Athukorala, 2009. "The Rise of China and East Asian Export Performance: Is the Crowding-Out Fear Warranted?," The World Economy, Wiley Blackwell, vol. 32(2), pages 234-266, 02.
  2. Warwick McKibbin & Andrew B Stoeckel & YingYing Lu, 2012. "Global Fiscal Adjustment and Trade Rebalancing," CAMA Working Papers 2012-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Dennis Tao Yang, 2012. "Aggregate Savings and External Imbalances in China," Journal of Economic Perspectives, American Economic Association, vol. 26(4), pages 125-46, Fall.
  4. Bonatti, Luigi & Fracasso, Andrea, 2013. "Regime switches in the Sino-American co-dependency: Growth and structural change in China," Structural Change and Economic Dynamics, Elsevier, vol. 25(C), pages 1-32.
  5. Bonatti, Luigi & Fracasso, Andrea, 2014. "Modeling the Transition Towards Renminbi's Full Convertibility: Implications for China’s Growth," MPRA Paper 54129, University Library of Munich, Germany.
  6. Bonatti, Luigi & Fracasso, Andrea, 2013. "Hoarding of international reserves in China: Mercantilism, domestic consumption and US monetary policy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1044-1078.

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