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What Drives China's Current Account?

  • Mathias Hoffmann

    (University of Zurich and Hong Kong Institute for Monetary Research)

The paper offers an empirical taxonomy of the factors driving China's current account. A simple present-value model with non-tradeable goods explains more than 70 percent of current account variability over the period 1982-2007, including the persistent surpluses since 2001. Expected increases in the prices of non-tradeables-housing and medical care-are the single most important channel of external adjustment, followed by consumption smoothing. Much of this pattern is driven by a permanent global shock that persistently depresses the world real interest rate and increases the current account, suggesting that shocks to precautionary saving are key in understanding China's surplus. These findings are robust to controlling for revaluation expectations in the fixed exchange rate regime and for measurement error in the current account balance.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 112010.

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Length: 31 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:hkm:wpaper:112010
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