a
The Chinese Current Account Surplus:
Where is This Growth Coming From?
The Eurasia Center
Kumar Bhattacharyya
April 15, 2014
Over the past decade, an interesting anomaly has surfaced on the Global Economy; China
has been running a massive Current Account surplus. This rise, from 68.7 billion USD in
2004, to a peak of 412.8 billion USD in 2008, to 201 billion USD in 2011, testifies to the
fact that China has been running the highest Current Account surplus in the world,
followed by Germany and Saudi Arabia.2
With China becoming more and more relevant in the discussion of global economic
imbalances, it is necessary to understand the various factors that have resulted in this
massive surplus. These factors can generally be grouped into five categories excluding
currency manipulation; Industry Relocation, Measurement Errors, By-products of
policies promoting growth, the Saving and Investment gap, and finally Factor market
distortions.
Why isn’t currency manipulation included in these factors? Because of this alarming rise,
US economic policymakers and policymakers around the world have cried foul, heavily
criticizing what they characterize as rampant Chinese currency manipulation being the
2. C.I.A World Fact Book. "China Current Account Balance." China Current Account Balance. N.p., n.d. Web. 02 Dec. 2013
http://www.indexmundi.com/china%2F/current_account_balance.html
5. Staiger, Robert W. "Currency "manipulation" and World Trade: A Caution." VOX. N.p., n.d. Web. 2 Dec. 2013
http://www.voxeu.org/article/currency-manipulation-and-world-trade-three-reasons-caution
1. Trachtman, Sam. "Understanding China's Trade Surplus: Going Beyond Currency Manipulation." China Research; A Center for
Collaborative Research on Greater China. N.p., n.d. Web. 2 Dec. 2013.
http://www.chinacenter.net/understanding-chinas-trade-surplus-going-beyond-currency-manipulation/
6. Morrison, Wayne M. "China's Currency Policy: An Analysis of the Economic Issues."Congressional Research Service 7-5700
(2013): n. page. Print
http://www.fas.org/sgp/crs/row/RS21625.pdf
a
prime culprit. Traditionally, currency manipulation practices distort trade, as they amount
to the equivalent of a subsidy to exports and a tariff on imports. The general argument is
that through currency manipulation, the Chinese were able to prevent the RMB from
appreciating against the rest of the world currencies, keeping its value artificially low.
Up until 2005, the Chinese RMB was pegged to the US dollar; however the Chinese
changed their policies, pegging the RMB to a larger basket of currencies.5
This allowed the RMB to appreciate 34% as of June 2013 against the U.S dollar.6 There
are other indications that give cause to criticize the accusation of such currency
undervaluation necessary to be the sole contributor to such a high surplus. China would
have to cope with devastating inflationary pressures, and while inflation has been high, it
seems the level of inflation does not reflect the degree to which some argue the RMB is
undervalued.1 It is highly implausible that only currency manipulation is that cause for
such a high Current Account surplus.
Measurement Errors
The quality and honesty with which numbers are presented by the Chinese government
has always been a major concern for economics all around the world. Because of this,
some have argued that there has been an overestimation of China’s Current Account
surpluses. The key proposition is that there were capital inflows, which would otherwise
be prohibited given capital account controls, disguised in forms of export revenues or
income transfers.8
This form of inflows is sometimes dubbed hot money inflows, and some third- party
entities such as Bank of America have claimed that the official numbers are vastly
overestimated.9 These ‘hot money inflows’ have been found to artificially increase the
Current Account, but only by 2-3 percentage points in recent years, not enough to be the
sole contributor.
Industry Relocation
Another factor that has played a huge role in China’s Current account surplus is the
relocation of industries from many Southeast Asian countries to China in the wake of the
’96 Asian crises.4
In 1978, China was just barely recognizable in terms of global exports, yet by 2012 China
established itself as the number one exporter in the world. Increasing by a factor of about
15, China is now responsible for 10% of all of global trade.4 The Asian ’97 crises allowed
China to amp up its trade, since most of the Southeast Asian countries transferred their
industry manufacturing to China, allowing China to jump from a regional exporter to a
global exporter. However, it is important to note that in the processing industries with
regards to China; usually 60-70% of the value of manufactured products was imported
content. As an assembler, China is the last stage of the international supply chain.8
b
This could give reason to speculate that perhaps Chinese exports are overvalued, another
possible measurement error that could boost China’s current account even higher then
what it should, in reality, be.
By-Product of Policies Promoting Strong Growth
It is no secret that the Chinese favor economic growth and maximum employment, and
that these policies focus much more on profits than profitability. Job creation has always
been a huge issue for the Chinese, as they have a massive labor surplus in the country
side. The growth targets that are set, for instance, are derived solely from the effort of job
creation and to increase output. Also, the exchange rate policy does play into these
policies that promote strong growth. It can be argued that there were two parts to Chinese
exchange rate policy; exchange rate protection for the export sector by currency
undervaluation, and to maintain a stable exchange rate. This exchange rate policy, along
with the idea that China built up foreign exchange reserves as a form of self-insurance
inevitably led to large current account surpluses as a by-product.4
The Saving and Investment Gap
The Household savings rate is startling. The average saving rate for urban households in
Chinas has increased from 15 percent in the early 1990’s to over 30 percent in recent
years.11 This high savings rate is a result of multiple factors, including an increasingly
elderly population, the nonexistence of government pension and welfare plans, and the
incredible cost of healthcare due to a lack of government subsidies.11 A high savings rate,
by definition, causes a high current account surplus, as Chinese reserves are growing and
are not being spent.1
Factor-Market Distortions
A relatively new theory that could explain the currency account surplus in China is the
existence of Factor-Market distortions, particularly the distortion of Labor. These cost
distortions generally push factor prices, and therefore production costs, to lower levels
then they would otherwise be in a free market environment. One key element that is
relevant in China is that outside the property sector, the government artificially
determines land prices.8 These cost distortions, because they push factor prices below the
8. Yiping, Huang. "Causes and Remedies of China's External Imbalances." China Center for Economic Research, Working Paper
Series E2010002 (2010): n. page. Print.
http://en.ccer.edu.cn/download/6802-1.pdf
9. News, Bloomberg. "China Trade Surplus Seen by BofA at One-Tenth Customs Figure."Bloomberg.com. Bloomberg, 21 May 2013.
Web. 02 Dec. 2013
http://www.bloomberg.com/news/2013-05-20/china-trade-surplus-seen-by-bofa-at-one-tenth-official-figure.html
4. Corden, Max. "China's Exchange Rate Policy, Its Current Account Surplus and the Global Imbalances." The Economic Journal 119
(2009): 1-12. Print
http://onlinelibrary.wiley.com/store/10.1111/j.1468-0297.2009.02319.x/asset/j.14680297.2009.02319.x.pdf?v=1&t=hoesc9he&s=127aec4d907a4e68bed6bc62391a9547984146dc
b
market price, actually end up acting as a major subsidy to both production and
investment.
c
On the flip side, these very low factor prices act as a heavy tax on the laborers. This tax
hits the households the hardest. Because of the low wages being paid out to the laborers,
household income is reduced and there is a depression on consumer spending. This
boosted investment and depressed consumption imply an imbalance that is already well
known to exist within China; the imbalance between investment and consumption, which
leads to an imbalance between domestic and external demand.8
In the labor market, China’s Hukou system (household registration) results in migrant
workers often are paid below their marginal product simply because they are not eligible
for the few benefits or labor protections that are made available to registered residents.
This takes the form of cheap labor being readily available and causes depressed
consumption, which widens the saving and income gap, creating further boosts to the
external sector surplus.8
These contributions to social welfare by employers makeup a large portion of the payroll,
and should urban employers make such contributions, the payroll would potentially rise
by 35-40 percent.8 So, essentially, employers that deal with migrant workers that do not
benefit from these social welfare systems built into their payroll lose that percentage, and
it is thus added to the profit of the employer.
Conclusion
This is but a short analysis of the entire puzzle of the Chinese Current Account surplus,
yet in order to understand this phenomena one must understand all of the parts of the
puzzle. The Current Account surplus continues to grow in China, and there seems little
reason for it to change. Change means uncertainty, a risk that many think the Chinese
government is not willing to take. As long as China continues to see high growth as well
as advancement in an array of other sectors, China will be unwilling to address the
growing imbalances in the global economy that are just under the surface.
c4.
Corden, Max. "China's Exchange Rate Policy, Its Current Account Surplus and the Global Imbalances." The Economic Journal 119
(2009): 1-12. Print
http://onlinelibrary.wiley.com/store/10.1111/j.1468-0297.2009.02319.x/asset/j.14680297.2009.02319.x.pdf?v=1&t=hoesc9he&s=127aec4d907a4e68bed6bc62391a9547984146dc
11. Chamon, Marcos; Liu, Kai; Prasad, Eswar (2010) : Income uncertainty and
household savings in China, Discussion paper series // Forschungsinstitut zur Zukunft der
Arbeit, No. 5331
http://www.econstor.eu/bitstream/10419/51714/1/66890092X.pdf
8. Yiping, Huang. "Causes and Remedies of China's External Imbalances." China Center for Economic Research, Working Paper
Series E2010002 (2010): n. page. Print.
http://en.ccer.edu.cn/download/6802-1.pdf