What Drives China's Current Account?

HKIMR Working Paper No. 11/2010

31 Pages Posted: 22 Jun 2010

See all articles by Mathias Hoffmann

Mathias Hoffmann

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 31, 2010

Abstract

The paper offers an empirical taxonomy of the factors driving China's current account. A simple present-value model with non-tradeable goods explains more than 70 percent of current account variability over the period 1982-2007, including the persistent surpluses since 2001. Expected increases in the prices of non-tradeables - housing and medical care - are the single most important channel of external adjustment, followed by consumption smoothing. Much of this pattern is driven by a permanent global shock that persistently depresses the world real interest rate and increases the current account, suggesting that shocks to precautionary saving are key in understanding China's surplus. These findings are robust to controlling for revaluation expectations in the fixed exchange rate regime and for measurement error in the current account balance.

Keywords: China, Current Account, Present-Value Models, External Adjustment, Global Imbalances, Savings Glut, Precautionary Saving

JEL Classification: F32, F3, F4

Suggested Citation

Hoffmann, Mathias, What Drives China's Current Account? (May 31, 2010). HKIMR Working Paper No. 11/2010, Available at SSRN: https://ssrn.com/abstract=1628049 or http://dx.doi.org/10.2139/ssrn.1628049

Mathias Hoffmann (Contact Author)

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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