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Causes and Remedies of China’s External Imbalances

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  • 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.

Suggested Citation

  • Huang Yiping & Tao Kunyu, 2010. "Causes and Remedies of China’s External Imbalances," Macroeconomics Working Papers 22723, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:macroe:22723
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    File URL: http://www.eaber.org/node/22723
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    References listed on IDEAS

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    1. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, pages 341-355.
    2. Jong-Wha Lee & Warwick J. McKibbin, 2007. "Domestic Investment And External Imbalances In East Asia," CAMA Working Papers 2007-04, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Gian M Milesi-Ferretti & Olivier J Blanchard, 2009. "Global Imbalances; In Midstream?," IMF Staff Position Notes 2009/29, International Monetary Fund.
    4. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, pages 341-355.
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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., pages 401-414.
    2. Rajan, Ramkishen, 2011. "Management of Exchange Rate Regimes in Emerging Asia," ADBI Working Papers 322, Asian Development Bank Institute.
    3. Huw McKay, 2012. "Metal intensity in comparative historical perspective: China, North Asia and the United States," Chapters,in: The Chinese Steel Industry’s Transformation, chapter 2, pages 17-44 Edward Elgar Publishing.

    More about this item

    Keywords

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

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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