What Drives China's Current Account?

Mathias Hoffmann

No 112010, Working Papers from Hong Kong Institute for Monetary Research

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 (search for similar items in EconPapers)
JEL-codes: F30 F32 F40 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2010-05
New Economics Papers: this item is included in nep-cba, nep-opm and nep-tra
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Related works:
Journal Article: What drives China's current account? (2013)
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