Why Has China's Current Account Balance Converged after the Global Financial Crisis?

China's current account surplus declined significantly from its peak of nearly 10 percent of GDP in 2007 to less than 1 percent in 2018. The new pattern offered fresh evidence for our understanding of China's current account dynamics. In this paper, we used flow of funds data to gauge its underlying driving forces. Specifically, by employing index decomposition analysis, we decomposed the current account from the perspective of savings and investment into three sectors: the household, corporate, and government sectors. We found that the decline in China's current account ratio was first driven by cyclical factors, i.e. weak corporate saving growth induced by the economic slump in 2009 as well as the following massive corporate investment bolstered by the government stimulus plan. However, such cyclical factors quickly subsided, and the subsequent current account balance reduction was later supported by structural factors, i.e. household savings declined enduringly and the Chinese government switched to a more expansionary fiscal policy. There are three possible explanations for the structural movement: reduced precautionary saving due to higher social security coverage ratio, lower corporate profits as a result of economic slowdown, and a twin deficit due to the government's more relaxed fiscal stance. The new facts, however, were not consistent with other current account theories focusing on long‐term aspects of the saving–investment account puzzle, especially those relating to China's special demographic characteristics.     

Global Imbalances: Is Germany the New China? A Skeptical View

In this paper we evaluate the current account patterns of China and Germany. We point out that China’s current account surplus as a share of global GDP in recent years resembles that of Germany’s. Yet, an important difference is that the Euro block’s current account inclusive of Germany has overall been balanced, whereas emerging Asia’s current account inclusive of China has mostly been characterized by sizable surpluses. We further find that both China and Germany’s current account surpluses seem to be accounted for by common factors. However we have reasons to doubt the long run viability of these current account trends in future decades. Demographic transitions in China and Germany are projected to reduce their surpluses, and this effect is stronger for Germany. We also discuss plausible reasons to doubt the extent to which the Euro block will move towards significant surplus in the coming years.     

Current Account and Fiscal Policy in Japan: 1885–1991

This paper explores the empirical relationship between the current account balance and macroeconomic series for the Japanese economy over the years 1885–1991. The long-run equilibrium depends on which series (public debt or budget deficits) affects assets relative to a capital stock rate. Departing from the Ricardian Equivalence structure (no bequest motives), fiscal policy in Japan is shown to be more related to the current account when policy is introduced by shifts in tax revenues rather than by changes in national debt.     

How would Capital Account Liberalization Affect China＇s Capital Flows and the Renminbi Real Exchange Rates？

In this paper we study the determinants of gross capital flows, project the size of China's international investment position in 2020, and analyze the implications for the renminbi real exchange rate if China liberalizes the capital account. We assume in this exercise that the renminbi will have largely achieved capital account convertibility by the end of the current decade, a timetable consistent with recent proposals by the People's Bank of China. Our analysis shows that if the capital account were liberalized, China's gross international investment position would grow significantly, and inflows and outflows would become much more balanced. The private sector would turn its net liability position into a balanced position, and the official sector would reduce its net asset position significantly, relative to the country's GDP. Because of the increasing importance of private sector foreign claims and the decreasing importance of official foreign reserves, China would be able to earn higher net investment income from abroad. Overall, China would continue to be a net creditor, with the net foreign asset position as a share of GDP remaining largely stable through this decade. These findings suggest that the renminbi real exchange rate would not be particularly sensitive to capital account liberalization as capital flows are expected to be two‐sided. The renminbi real exchange rate would likely be on a path of moderate appreciation as China is expected to maintain a sizeable growth differential with its trading partners.     

Real Exchange Rates and the Balance of Trade: Does the J-curve Effect Really Hold?

Open Economies Review - In this paper, we re-examine the relationship between trade flows, real effective exchange rates, and incomes by using the bilateral trade flows of 33 countries that form...     

UK External Imbalances and the Sterling: Are they on a Sustainable Path?

An updated version of Krugman’s 1993 MMF framework is used to consider the implications of buoyant domestic demand for the real exchange rate and debt dynamics. The updating includes a Taylor rule for monetary policy and explicit treatment of external assets and liabilities. In response to an exogenous rise in the aggregate demand, short-run appreciation of the real exchange rate is followed by a prolonged decline as external debt accumulates and net wealth deteriorates. Whether in equilibrium the real exchange rate is stronger or weaker depends crucially on a comparison of real interest rates and the growth rate. If the domestic growth rate is higher than global real interest rates, the currency may strengthen in the long run despite the deterioration of net external assets. To see whether the strength of sterling is sustainable, the analysis is briefly calibrated to UK data over the last decade. Blanchard et al. (The US current account and the dollar. CEPR DP no 4888, 2005) suggest that international liabilities to be treated as imperfect substitutes: so we check to see how this would affect our results.

The Lack of International Consumption Risk Sharing: Can Inflation Differentials and Trading Costs Help Explain the Puzzle?

The bulk of evidence on the lack of international risk sharing is based on regressions of idiosyncratic consumption growth on idiosyncratic output growth. This paper argues that the results from such regressions obtained from international data are, however, not directly comparable to those based on regional data: the standard practice of running such regressions on international data fails to account for persistent international differentials in consumer prices, whereas—implicitly—most of the literature based on regional data has accounted for these differences. When risk sharing regressions are set up in conceptually the same way in international and regional data sets, the estimated coefficients are also very similar. To explore this result further, we adapt the variance decomposition of Asdrubali et al. (Q J Econ 111:1081–1110, 1996) to allow for deviations from purchasing power parity across countries. While quantity (income and credit) flows are the dominant channel of risk sharing among regions, relative consumption and output price (internal terms of trade) fluctuations account for the bulk of the deviation from the complete markets outcome in international data. To the extent that persistent differences in consumer prices are an indication of goods market segmentation, our findings provide empirical evidence for the proposition by Obstfeld and Rogoff (NBER Macroeconomics Annual 2000, 2000) that segmented international goods markets rather than asset market incompleteness may account for the (apparent) lack of risk sharing between countries.

International Trade and Bank Groups: Welfare Enhancing or Welfare Reducing?

In international competition, are bank groups efficiency enhancing or efficiency reducing? This paper attempts to clarify this issue by asking instead: efficiency for whom? In a simple, illustrative model, this paper shows that bank groups can be efficiency enhancing for the bank and the member firms, but hurting its competitor. More important global welfare rises with bank groups. These results are robust when we allow the bank and the member firm to bargain over its loan rate, when bank groups can be formed endogenously and when there are multiple exporters. Results in this paper suggest alternative interpretations of existing econometric results concerning the role of Japanese groups in U.S.–Japan trade. J. Japan. Int. Econ., June 2002, 16(2) pp. 212–226. Department of Economics, University of California, Santa Cruz, Santa Cruz, California.     

Exchange Rates and the Trade Balance for Dynamic Asian Economies—Does the J-Curve Exist for Singapore,Malaysia, and Korea?

The purpose of this article is to examine the relationship between the real trade balance and the real exchange rate for bilateral trade in merchandise goods between Singapore, Korea, and Malaysia and the USA and Japan on a quarterly basis over the period 1970 to 1996 using the partial reduced form model of Rose and Yellen (1989) derived from the two-country imperfect substitutes model. With the exception of Korean trade with the USA, and in line with recent work using a similar methodology, our findings suggest that the real exchange rate does not have a significant impact on the real trade balance, and for Singapore and Malaysia we can find no persuasive evidence for J-curves. For Korea, however, the data were consistent with some J-curve effects with respect to both Japan and the USA. Moreover, it is possible that for Korea these effects were being masked or muted by small country pricing of exports in foreign currency, but there was no evidence that imports subsequently fell as the lag length on the real exchange rate increased, which would be required to support a strict interpretation of the J-curve.     

Real Exchange Rate Dynamics in the Asian Economies: Can Regime Shifts Explain Purchasing Power Parity Puzzles?

Abstract

We show that the strong version of the purchasing power parity (PPP) hypothesis holds in most of the US dollar real exchange rates using cointegration method that accounts for breaks in the models. The break dates in seven of the Asian currencies coincide with the two rounds of currency depreciation recorded during the 1997–1998 financial crises. We obtain a mean half-life estimate of about 10 months for PPP to converge to its long-run equilibrium level. Our confidence intervals based on persistence profile approach for the half-lives is much narrower than previous evidence might indicate. Taken together, these results show that mean reversion is stronger than commonly thought.     

China's Belt and Road Initiative: Can Europe Expect Trade Gains?

The Belt and Road Initiative (BRI) aims to improve cross‐border infrastructure to reduce transportation costs across a massive geographical area between China and Europe. We estimate how much trade might be created among Belt and Road (B&R) countries as a consequence of the reduction in transportation costs (both railway and maritime) and find that European Union countries, especially landlocked countries, will benefit considerably. This is also true for Eastern Europe and Central Asia and, to a lesser extent, South‐East Asia. In contrast, if China were to seek to establish a free trade area within the B&R region, EU member states would benefit less, while Asia would benefit more. Xi Jinping's current vision for the B&R, centered on improving transport infrastructure, is advantageous for Europe as far as trade creation is concerned.     

Exchange rate regimes and real exchange rate volatility: Does inflation targeting help or hurt?

This paper revisits the comparison of the effects of inflation targeters versus hard fixers and intermediate exchange rate regimes. In particular, we are interested in exploring the impact of inflation targeting (IT) on real effective exchange rate (REER) volatility for a panel of 62 developing countries over the period 2006–2012. We also analyze the impact of IT regimes on REER in terms of its two component parts, i.e. relative tradable prices across countries as well as sectoral prices of tradables and nontradables within countries. The paper accounts for self-selection concerns regarding policy adoption and examines the effects of commodity exports and foreign exchange intervention. Notably, IT regimes seem to have experienced greater REER volatility, largely driven by external prices in developed countries. For developing countries, IT regimes show no difference in REER volatility, though there is some evidence that they have lower volatility in internal prices.     

Minimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor?

Using data drawn from the March Current Population Survey, we find that state and federal minimum wage increases between 2003 and 2007 had no effect on state poverty rates. When we then simulate the effects of a proposed federal minimum wage increase from $7.25 to $9.50 per hour, we find that such an increase will be even more poorly targeted to the working poor than was the last federal increase from $5.15 to $7.25 per hour. Assuming no negative employment effects, only 11.3% of workers who will gain live in poor households, compared to 15.8% from the last increase. When we allow for negative employment effects, we find that the working poor face a disproportionate share of the job losses. Our results suggest that raising the federal minimum wage continues to be an inadequate way to help the working poor.     

Financing and monitoring in an emerging economy: Can investment efficiency be increased?

This study investigates the influence of the financial system on firms' investment efficiency in China. For this purpose, we employ country level data of capital markets and financial institutions along with financial data from 2797 Chinese firms in the period from 1998 to 2015. The firms are priori classified into four groups, by high and low values of financial constraints and agency problems. Results show that financial development influences firms' investments positively either directly or by reducing cash flow sensitivity. The impact remains the same for all types of firms. Moreover, the financial structure has an impact on investment efficiency of firms; this result also remains the same even after controlling levels of financial development. Study contributes that capital market based financial structure impacts investment decisions by reducing financing constraints and agency issue due to its strong monitoring ability.