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Factor Market Distortion and the Current Account Surplus in China

Yiping Huang and Kunyu Tao
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Kunyu Tao: China Center for Economic Research, Peking University, Yiheyuan Road No. 5, Beijing, China 100871.

Asian Economic Papers, 2010, vol. 9, issue 3, 1-36

Abstract: China's large current account surpluses not only destabilize its own macroeconomic conditions, but are also a focal point for global rebalancing discussions. Existing explanations by the literature fail either to account for the recent surge or to offer actionablepolicy responses. In this study, we propose an alternative hypothesis: asymmetric market liberalization and associated cost distortions. These distortions are producer subsidy equivalents, which contributed to both extraordinary growth performance and the growing structural imbalances. Our rough estimates of such factor cost distortions offer some explanations for recent movements of the current account. We argue that China needs to adopt a comprehensive reform package to rebalance its economy. (c) 2010 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

Date: 2010
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