Rebalancing the Chinese economy

Abstract

China has run a current account surplus for two decades. Its current account surplus is not simply a result of the saving gap. Rather, the current account surplus, as well as the saving gap, is a result of complicated interaction among various factors in a dynamic fashion. While running a large current account surplus, China has also run a large capital account surplus mainly in the form of FDI over decades. China’s ‘twin surpluses’ are a reflection of market distortion, which has caused large welfare losses for the country. The Chinese government should not only pay attention to internal balance but also to external imbalance. Hence it should combine expenditure-switching policies and expenditure-changing policies to maintain a decent non-inflationary growth rate, while keeping the current-account-balance-to-GDP ratio at a rational level.

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