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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

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  • Huang, Yiping

    (Asian Development Bank Institute)

  • Tao, Kunyu

    (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

  • Huang, Yiping & Tao, Kunyu, 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. Commission on Growth and Development, 2008. "The Growth Report : Strategies for Sustained Growth and Inclusive Development," World Bank Publications - Books, The World Bank Group, number 6507, December.
    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. Ludovic Gauvin & Cyril C. Rebillard, 2018. "Towards recoupling? Assessing the global impact of a Chinese hard landing through trade and commodity price channels," The World Economy, Wiley Blackwell, vol. 41(12), pages 3379-3415, December.
    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. 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.
    4. M. Albert & C. 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.
    5. 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.
    6. Antonia Reinecke & Hans-Jörg Schmerer & Carsten A. Holz & Frederik Kunze & Torsten Windels & Horst Löchel & Markus Taube, 2016. "China’s Growth Model in Trouble: How Great is the Risk for the World Economy?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 69(07), pages 05-20, April.

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    More about this item

    Keywords

    prc; current account surplus; economic rebalancing; exchange rate; factor market distortion;
    All these keywords.

    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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