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Trade integration,restructuring and global imbalances --A tale of two countries

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  • Teng, Faxin
  • Meier, Claudia
  • Kamenev, Dmitry
  • Klein, Martin

Abstract

China is widely seen as one of the sources of global macroeconomic imbalances. Its persistent current account surplus and capital exports to the United States are even cited as one of the causes of the global financial crisis. The most common explanation traces China's current account surplus to a mismatch between saving and investment due to inefficiently low domestic demand. We challenge this explanation. Our argument rests on an analogy that we construct between two countries generally thought to be very different: Russia and China. Russia, a raw materials exporting country, has been running current account surpluses similar to China's in relation to GDP. As for most raw materials exporting countries this is considered normal, reflecting efficient reinvestment of wealth from natural resources in financial assets. We show that a similar efficiency argument can be constructed for China, although the nature of wealth that is reinvested in financial assets is different in the two countries. Our analysis implies that China's current account surpluses can be expected to disappear over the long horizon – although the time when this will happen may still be very far away. Moreover, an appreciation of the Chinese currency may not have the desired effect of mitigating the country's current account surplus as a weakening in competitiveness is counterbalanced by a strengthening of investment motives.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 31946.

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Date of creation: Jun 2011
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Handle: RePEc:pra:mprapa:31946

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Keywords: trade structures; trade imbalances; current account imbalances; outside assets;

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  1. Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2011. "The macroeconomic effects of large exchange rate appreciations," ZEW Discussion Papers 11-016, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Bowden Roger J. & Huang Hui, 2009. "Infrastructure, Commodity Spectra, and Trade Transitions in Economic Development," Global Economy Journal, De Gruyter, vol. 9(2), pages 1-33, June.
  3. Petsas, Iordanis, 2009. "Sustained Comparative Advantage and Semi-Endogenous Growth," MPRA Paper 14297, University Library of Munich, Germany.
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