Aggregate Savings and External Imbalances in China

Over the last decade, the internal and external macroeconomic imbalances in China have risen to unprecedented levels. In 2008, China's national savings rate soared to over 53 percent of its GDP, whereas its current account surplus exceeded 9 percent of GDP. This paper presents a unified framewo...

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Bibliographic Details
Published in:The Journal of economic perspectives 2012-10, Vol.26 (4), p.125-146
Main Author: Yang, Dennis Tao
Format: Article
Language:English
Subjects:
American dollar
Balance of payments
Capital losses
China
Consumption
Current account
Developing countries
Economic growth
Economic reform
Economic theory
Economics
Exchange rate policy
Financial investments
Foreign direct investments
Foreign investment
GDP
Government bonds
Gross Domestic Product
Household saving
Households
Income distribution
International economics
Investments
Labor market
LDCs
Macroeconomics
Politics
Population
Savings
Savings rates
Social welfare
Studies
Symposium: China's Economy
Trade policy
Trade surplus
Trends
Welfare reform
World Trade Organization
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Summary:Over the last decade, the internal and external macroeconomic imbalances in China have risen to unprecedented levels. In 2008, China's national savings rate soared to over 53 percent of its GDP, whereas its current account surplus exceeded 9 percent of GDP. This paper presents a unified framework for understanding the structural causes of these imbalances. I argue that the imbalances are attributable to a set of policies and institutions embedded in the economy. I propose a unified framework for understanding the joint causes of the high savings rate and external imbalances in China. My explanations first focus on an array of factors that encouraged saving across the corporate, government, and household sectors, such as policies that affected sectoral income distribution, along with factors like incomplete social welfare reforms, and population control policies. I then turn to policies that limited investment in China, thus preventing the high savings from being used domestically. Finally, I will examine how trade policies, such as export tax rebates, special economic zones, and exchange rate policies, strongly promote exports. Moreover, the accession of China to the World Trade Organization has dramatically amplified the effects of these structural distortions. In conclusion, I recommend some policy reforms for rebalancing the Chinese economy. [PUBLICATION ABSTRACT]
ISSN:0895-3309
1944-7965
DOI:10.1257/jep.26.4.125