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Causes of and Remedies for the People’s Republic of China’s External Imbalances: The Role of Factor Market Distortion

Author

Listed:
  • Yiping Huang

    (Asian Development Bank Institute)

  • Kunyu Tao

    (Asian Development Bank Institute)

Abstract

The current account surplus of the People’s Republic of China (PRC) has drawn much foreign and domestic attention. This paper focuses on the reasons and remedies for the PRC’s current account surpluses. Rather than deploying the standard explanations, we argue that asymmetric market liberalization and the related factor market distortion is the root reason for the PRC’s external imbalances. These cost distortions have artificially lowered PRC production costs, raised profits, and improved their products’ international competitiveness which has not only stimulated the economy, but also brought about severe structural risks. We completed a crude estimation for factor cost distortions in the PRC during 2000–2009 which matched its current account surpluses quite well. In order to rebalance the economy, we recommend that the PRC should adopt a comprehensive reform package focusing on removing the factor market distortions.

Suggested Citation

  • Yiping Huang & Kunyu Tao, 2011. "Causes of and Remedies for the People’s Republic of China’s External Imbalances: The Role of Factor Market Distortion," ADBI Working Papers 279, Asian Development Bank Institute.
    • Handle: RePEc:ris:adbiwp:0279
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    References listed on IDEAS

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    1. repec:wbk:wbpubs:6507 is not listed on IDEAS
    2. Wing Thye Woo, 2006. "The Structural Nature of Internal and External Imbalances in China," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 4(1), pages 1-19.
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    Cited by:

    1. Tomoyuki Fukumoto & Ichiro Muto, 2012. "Rebalancing China's Economic Growth: Some Insights from Japan's Experience," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 20(1), pages 62-82, January.
    2. Damian Tobin, 2013. "Renminbi internationalisation: precedents and implications," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 11(2), pages 81-99, May.
    3. M. Albert & Cristina Jude & C. Rebillard, 2015. "The Long Landing Scenario: Rebalancing from Overinvestment and Excessive Credit Growth. Implications for Potential Growth in China," Working papers 572, Banque de France.
    4. Dieppe, Alistair & Gilhooly, Robert & Han, Jenny & Korhonen, Iikka & Lodge, David, 2018. "The transition of China to sustainable growth – implications for the global economy and the euro area," Occasional Paper Series 206, European Central Bank.
    5. Antonia Reinecke & Hans-Jörg Schmerer & Carsten A. Holz & Frederik Kunze & Torsten Windels & Horst Löchel & Markus Taube, 2016. "Chinas Wachstumsmodell in Schwierigkeiten: Wie groß ist das Risiko für die Weltkonjunktur?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 69(07), pages 05-20, April.
    6. Gauvin, Ludovic & Rebillard, Cyril, 2013. "Towards Recoupling? Assessing the Impact of a Chinese Hard Landing on Commodity Exporters: Results from Conditional Forecast in a GVAR Model," MPRA Paper 65457, University Library of Munich, Germany.
    7. Philip I. Levy, 2011. "The United States and China: macroeconomic imbalances and economic diplomacy," AEI Economics Working Papers 49156, American Enterprise Institute.

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    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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