Causes of and Remedies for the People’s Republic of China’s External Imbalances: The Role of Factor Market Distortion

33 Pages Posted: 20 Apr 2011

See all articles by Yiping Huang

Yiping Huang

Peking University, National School of Development

Kunyu Tao

Central University of Finance and Economics

Date Written: April, 15 2011

Abstract

The current account surplus of the People’s Republic of China (PRC) has drawn much foreign and domestic attention. This paper focuses on the reasons and remedies for the PRC’s current account surpluses. Rather than deploying the standard explanations, we argue that asymmetric market liberalization and the related factor market distortion is the root reason for the PRC’s external imbalances. These cost distortions have artificially lowered PRC production costs, raised profits, and improved their products’ international competitiveness which has not only stimulated the economy, but also brought about severe structural risks. We completed a crude estimation for factor cost distortions in the PRC during 2000-2009 which matched its current account surpluses quite well. In order to rebalance the economy, we recommend that the PRC should adopt a comprehensive reform package focusing on removing the factor market distortions.

Keywords: prc, current account surplus, economic rebalancing, exchange rate, factor market distortion

JEL Classification: F32, O11, H24, E61

Suggested Citation

Huang, Yiping and Tao, Kunyu, Causes of and Remedies for the People’s Republic of China’s External Imbalances: The Role of Factor Market Distortion (April, 15 2011). ADBI Working Paper No. 279. Available at SSRN: https://ssrn.com/abstract=1810682 or http://dx.doi.org/10.2139/ssrn.1810682

Yiping Huang (Contact Author)

Peking University, National School of Development ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Kunyu Tao

Central University of Finance and Economics ( email )

39 South College Road
Beijing
China

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