China’s Macroeconomic Imbalances: Causes and Consequences

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 2004–07. 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 stabilisation 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.

Investigating China's Disaggregated Processed Exports: Evidence that Both the RMB and Exchange Rates in Supply Chain Countries Matter

“…The share of domestic content in China's processing exports has been increasing recently. Knight and Wang () reported that China's high investment levels in recent years have enabled firms to substitute foreign sources of intermediate products with domestic sources. Kuijs () observed that China has developed deeper supply chains in the processing sector and that more of the value added of processed exports can now be produced in China.…”

Foreign Exchange Accumulation and the Entrapment of Chinese Monetary Power: Towards a Balanced Growth Regime?

“…but by the persistent decrease in the households' share of national disposable income' (Ivanova 2011: 867; for empirical support of this assertion see Aziz and Cui 2007). Importantly, most studies of China's evolving savings structure show that government and especially corporate savings -usually defined as corporate profits minus dividends -have been the key driver of its rising aggregate savings (Kuijs 2006;Knight and Wang 2011;Ma and Yi 2010; Figure 3). Given that government savings have increased largely as a result of the steady rise in government revenue linked to the investment-led economic expansion, China's saving structure reflects the declining share of household income and consumption …”

“…Overcapacity leads to a shortage of adequate investment channels in the 'real' economy, thus making available excess liquidity for 'financial' transactions in the stock market and the real estate market (Chen 2008;Sun and Zhang 2008). As a result, the surge in surplus liquidity associated with massive reserve accumulation coincided with the development of bubbles in both the stock and real estate markets: between 2004 and 2009 average house prices in China's 35 main cities tripled, whereas the Shanghai comprehensive stock index surged from 998 in July to 6212 in October 2007 (Knight and Wang 2011).…”

Bank excess reserves in emerging economies: A critical review and research agenda

“…Following this argument, the mainstream literature focuses on the causes of the excess foreign exchange reserves (international reserves). China's export-led strategy builds up a large current account surplus, which is interpreted as strong economic fundamentals and attracts intensive capital inflows (Knight & Wang, 2011;Zhang, 2009). These twin surpluses build up foreign exchange reserves to high levels (Chen, 2008).…”