RCIF | Research Center for International Finance
Working Paper No. 2021W01
Jan. 28th 2021
Why Has China’s Current Account Balance Converged
after the Global Financial Crisis?
Jianwei Xu, Panpan Yang, Guangrong Ma
Abstract
China’s current account surplus declined significantly from its peak of nearly 10 percent in 2007 to less than 1 percent (of GDP) in 2018. The new pattern offered fresh evidence for our understanding of China’s current account dynamics. In this paper, we used the flow of funds (FFA) data to gauge its underlying driving forces. Specifically, by employing index decomposition analysis (IDA), we decomposed the current account from the perspective of savings and investment into three sectors: the household, corporate, and government sectors. We found that the decline in China’s current account ratio was first driven by cyclical factors, i.e. weak corporate saving growth induced by the economic slump of 2009 as well as the following massive corporate investment bolstered by the government stimulus plan. However, such cyclical factors quickly subsided, and the subsequent current account balance reduction reduced precautionary saving due to higher social security coverage ratio, lower corporate profits as a result of economic slowdown, and a twin deficit due to the government’s more relaxed fiscal stance. The new facts, however, seems failing to accommodate the other current account theories focusing on the long-term aspect of the saving-investment account puzzle, especially those about China’s special demographic characteristics.
Key words: current account, flow of funds accounts, investment, saving
I. Introduction
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II. Literature review
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III. Methodology
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IV. The savings and investment pattern
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V. How does the new pattern of China’s current account fit the existing theory?
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VI. Conclusion
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