Inner Workings of the Chinese Economy and the U.S.-China Trade War

Abstract

China has been touted as a unique success story in development economics. The world financial crisis of 2007--2010 impacted China severely. Its GDP growth slowed, corporate debts piled up, equity markets became volatile, the renminbi weakened, and its forex reserves shrank in the face of capital flight. This paper analyzes the policymakers' approaches in coping with the recent external shocks to the economy noted for having rigid economic structures (such as the trilemma problem and privatization issues). It discusses the tough balancing act facing the policymakers and the various reform options, including capital flow liberalization and structural reform. Finally, the paper discusses the U.S.-China trade war.

Keywords: China's economy; yuan devaluation; capital flight; forex reserves; impossible trinity; SOEs; US.-China trade war

JEL Classification: E50, E61, F32, F34, O53