BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 15/2011:
China’s Macroeconomic Imbalances: Causes and Consequences
John Knight ()
and Wei Wang
Abstract: In recent years China has experienced two forms of extreme
macroeconomic imbalance: an expenditure imbalance in the sense of very high
investment and very low consumption, giving rise to rapid capital
accumulation; and an imbalance between expenditure and production,
producing external imbalance, i.e. a huge surplus on the current account of
the balance of payments. Both imbalances imply a low rate of time discount
by both government and society: consumption in the present is forgone in
favour of consumption in the future. The paper examines how these
imbalances came about, and goes on to consider whether they can be
sustained and how they might be redressed. There is no evidence that the
rapid capital accumulation has reduced the rate of profit on capital and
thus the incentive to invest. However, persistent external imbalance poses
a threat to investment if it generates excess liquidity and asset bubbles.
The current account surplus rose remarkably in the years 2004-7. This was
associated with exogenous increases in competiveness and in saving, both
attributable to the economic reform policies. On current policies, the
surplus is likely to rise again once the world economy recovers from its
recession. This poses three sorts of problems, each of which is examined in
turn: difficulties for macroeconomic stabilization policies; risk of
capital loss on the foreign exchange holdings; and the threat of
retaliation by China's trading partners. A combination of internal and
external policies will be required to redress the imbalance.
Keywords: China; investment; consumption; current account; exchange rate; external imbalance; macroeconomic imbalance; (follow links to similar papers)
JEL-Codes: E21; E22; E61; F32; F41; F51; (follow links to similar papers)
54 pages, June 21, 2011
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