“China’s Current Account: External Rebalancing or Capital Flight?”

“China’s Current Account: External Rebalancing or Capital Flight?”

Anna Wong

FRB International Finance Discussion Paper No. 1208, June 2017

With China’s current account surplus falling from about 10 percent of GDP in 2007 to below 1.5 % of GDP in 2013, the days of colossal current account surpluses appear to be a distant memory. In this paper Anna Wong provides evidence that suggests that China’s official current account balance in recent years has been distorted to some extent by large financial outflows disguised as service trade transactions. To do so she uses two empirical approaches. On the one hand the so called mirror approach and on the other hand one that relies on econometric models.

“Physical Capital Estimates for China’s Provinces, 1952-2015 and Beyond” by Carsten A. Holz & Sun Yue

Carsten A. Holz & Sun Yue

CESifo Working Paper No. 6472 (May 2017)

Capital estimates are widely used in economic growth and productivity studies, for profitability considerations and wealth accounting exercises. Yet the calculation of “capital” frequently receives only cursory attention, despite the challenges posed by conceptual difficulties, the complexity of calculations, and the extensive data requirements. This paper (i) calculates long-run provincial (and national) physical capital series for China, (ii) distinguishes between capital services and wealth capital stock, and (iii) applies the most recent methodology advanced by the OECD, the U.S. Bureau of Labor Statistics, and the Australian Bureau of Statistics. The complete set of data is available online and is expected to be updated on an annual basis in the future.

[You find the paper here]

“Foreign Acquisitions and Target Firms’ Performance in China”

“Foreign Acquisitions and Target Firms’ Performance in China”

Qing Liu, Ruosi Lu, Larry D. Qiu

In: The World Economy (2017), Vol. 40, No. 1, 2-20

How foreign acquisitions affect the economy of the target country and the performance of the target firms is a question of particular interest, especially for developing countries. Lie et al. examine in their paper the effects of foreign acquisitions in China. They notice the special situation in China’s economy and answer the question whether the effects of foreign acquisitions in China are similar to those in developed countries or developing countries, or if they are unique.

“The impacts of political uncertainty on asset prices: Evidence from the Bo scandal in China”

“The impacts of political uncertainty on asset prices: Evidence from the Bo scandal in China”

Laura Xiaolei Liu, Haibing Shu and K.C. John Wei

in: Journal of Financial Economics (2017)

In this paper Liu et al. investigate the impact of political uncertainty on asset prices. They identify an unexpected political event that occurred in China as an exogenous shock to political stability – the Bo Xilai Scandal on March, 14, 2012. Because this shock was unforeseen and increased political uncertainty immediately following its occurrence, it serves as an ideal setting to test the causal link between political instability and asset prices. For a better understanding of the situation Bo’s political scandal is described briefly within the paper.

“How did China’s WTO entry benefit U.S. consumers?”

“How did China’s WTO entry benefit U.S. consumers?”

Mary Amiti, Mi Dai, Robert C. Feenstra and John Romalis

NBER Working Paper No. 23487

During the last 20 years China has emerged as the world’s largest exporter, especially due to its rapid export growth following its World Trade Organization (WTO) entry in 2001. Surprisingly little analysis has been made of the potential gains to consumers in the rest of the world, who could benefit from access to cheaper Chinese imports and more important varieties. In this paper Amiti et al. identify that China’s WTO entry reduced U.S. price indexes. Furthermore they quantify how much U.S. consumer welfare improved due to China’s WTO entry.

“China’s Lost Generation: Changes in beliefs and their intergenerational transmission”

“China’s Lost Generation: Changes in beliefs and their intergenerational transmission”

Gerard Roland and David Y. Yang

NBER Working Paper No. 23441

China’s Cultural Revolution suspended regular higher education for an entire decade (1966-1976), creating the so-called Lost or Delayed Generation. Growing up during that period the Delayed Generation was deprived of higher education opportunities at an age when youths would typically consider attending college. This shock allows Roland and Yang to examine if differences in the opportunity cost of attending university persistently shaped citizens’ beliefs on whether efforts pay off in determining success. Moreover, they investigate to what extent the changed beliefs may affect citizens’ behavior, particularly their decisions to invest in their children’s education and to transmit such beliefs to the next generation.

„A Real Estate Boom With Chinese Characteristics”

„A Real Estate Boom With Chinese Characteristics”

Edward Glaeser, Wei Huang, Yueran Ma, and Andrei Shleifer

In: Journal of Economic Perspectives Vol. 31, No. 1, 93-116

Is the Chinese real estate boom a bubble? This question takes the center stage in the paper of Glaeser et al. They approach it by analyzing the determinants of demand and supply of housing in China. Further they use the great housing boom in the United States as a benchmark to put the Chinese boom into perspective and highlight its unique features. Finally they conclude, that a housing crash isn’t inevitable, but that the outcome depends largely on the decisions that will be made by the Chinese government.

„Human Capital and China’s Future Growth”

„Human Capital and China’s Future Growth”

Hongbin Li, Prashant Loyalka, Scott Rozelle, and Binzhen Wu

In: Journal of Economic Perspectives Vol. 31, No. 1, 25-48

Li et al. consider the sources and prospects for economic growth in China with a focus on human capital. They present a short overview about the Chinese hukou-policy and its development. By using an ordinary least square regression model, the typical relationship between human capital and output in different economies around the world is shown. In the end they present some policy suggestions of what China can do today to further raise its human capital up on to the standard of high-income countries.

„From ‚Made in China‘ to ‚Innovated in China’?: Necessity, Prospect and Challenges”

„From ‚Made in China‘ to ‚Innovated in China’?: Necessity, Prospect and Challenges”

Shang-Jin Wei, Zhuan Xie, and Xiaobo Zhang

In: Journal of Economic Perspectives Vol. 31, No. 1, 49–70

The Chinese economy is at a crossroad. Structural factors in the form of less-favorable demographics and a higher cost of labor imply a lower potential growth rate. To achieve robust future growth structural reforms are a must. Therefore Wei et al. study three questions. First, how strong is the Chinese’s national investment in research and development (R&D). Second, what is the growth of innovation by Chinese firms. Third, are there significant resource misallocations in the innovation space. They find that Chinese firms have demonstrated the capacity to become more innovative in response to wage pressure and global opportunities. Further they show that government subsidies tend to favor state-owned firms, and yet both domestic private sector firms and foreign-invested firms are more effective in converting investment in R&D to innovation outcomes as measured by patents.

“Tariffs and the Organization of Trade in China”

“Tariffs and the organization of trade in China”

Loren Brandt, Peter M. Morrow

in: Journal of International Economics Vol. 104, 85-103
Beginning in the mid-1990s, China started a program of tariff liberalization that saw average tariffs fall from over 40 percent in 1995 to less than 10 percent in 2001. This paper examines the impact of China’s falling import tariffs on the organization of its exports between ordinary and processing trade.

“The Great Housing Boom of China”

“The Great Housing Boom of China”

Kaiji Chen, Yi Wen

in: American Economic Journal: Macroeconomics, Vol. 9, No. 2, 73-114

Real housing prices outpacing income, a high vacancy rate, and a high rate of return to capital: this describes the current and puzzling situation on the Chinese real estate market. Chen and Wen present a model that interprets China’s housing boom as a rational bubble and fits with many salient features of the Chinese economy.

“China’s GDP Growth May Be Understated”

“China’s GDP Growth May Be Understated”

Hunter Clark, Maxim Pinkovskiy. Xavier Sala-i-Martin

NBER Working Paper No. 23323

Clark et al. discuss the concerns about the quality of China’s official GDP statistics and whether Chinese growth is under- or overstated by those statistics. Therefore they exploit nighttime lights to compute the optimal weights for various economic indicators to a best unbiased predictor of Chinese growth rates.

“Industrial Policies for Avoiding the Middle-income Trap: A New Structural Economics Perspective”

“Industrial Policies for Avoiding the Middle-income Trap: A New Structural Economics Perspective”

Justin Yifu Lin

in: Journal of Chinese Economic and Business Studies Vol. 15, No. 1, 5-18

In this paper Lin presents a manual how middle-income countries can avoid the middle-income trap by using limited resources to facilitate technological innovation and industrial upgrading. Thus, these economies can overcome coordinating issues and inherent externalities during the process of structural transformation.

Most important papers related to East Asia

Prof. Dr. Helmut Wagner

1. On “Implications of Structural Change, Middle-Income-Trap and ,Rebalancing’ in China”:

  • “The Building Up of New Imbalances in China: The Dilemma with ‘Rebalancing”, ceames-DP No. 3, forthcoming in: International Economics and Economic Policy, vol. 14 (2017); ( already published online Sept. 2016: in IEEP; DOI 10.1007/s10368-016-0360-4 )
  • “The Middle-Income Trap – Definitions, Theories and Countries Concerned: A Literature Survey” (Co-author: Linda Glawe), in: Comparative Economic Studies, vol. 58, pp. 507-538 (2016)
  • “Challenges to China’s Policy: Structural Change”, in: Comparative Economic Studies, vol. 55, 2013, pp. 721-736.
  • “Structural Change and Mid-Income Trap – Under which conditions can China succeed in moving towards higher income status?” forthcoming in: European Journal of Comparative Economics, vol. 12(4), 2015.
  • “Effects of Structural Change on Economic Growth and Shock Absorption Capability in China”, unpublished Working Paper, 2015. (Präsentiert im Rahmen der “14th Annual Conference of the European Economics and Finance Society (EEFS)”, Brüssel, Belgien, 11.– 14. Juni 2015.)

2. On “The Relevance of Improving Governance Structures for China – Lessons from other countries”:

  • “Fiscal Issues in the New EU-Member Countries – Lessons for Asian Economic and Monetary Cooperation?”, (in chinese translation) in: World Economic Papers, Issue 2, 2007.
  • “The impact of European integration on institutional development” Schönfelder / Wagner, MPRA Paper No. 63392, 2015.
  • “A Structural Approach to Financial Stability: On the Benefical Role of Regulatory Governance”, in: Journal of Governance and Regulation, vol.2, issue 1, 2013, (Co-author: B. Mohr), pp. 7-26.
  • “Is the European Monetary Union Sustainable? The Role of Convergence“, In: S. Kaji and E. Ogawa (eds.), Who will provide the Next Financial Model?: Asia‘s Muscle and Europe‘s Financial Maturity, Springer Japan 2013, pp. 183-218.

3. On “Creating and fighting asset price booms”:

  • “The causes of the recent financial crisis and the role of central banks in avoiding the next one”, in International Economics and Economic Policy, vol. 7, No. 1, 2010, pp. 63-82.
  • “Monetary Policy and Asset Prices: More Bad News for ‘Benign Neglect’ “, (Co-author: W. Berger, F. Kißmer), in International Finance, Vol. 10 No. 1, 2007, pp. 1-20.

4. On “Asian Crisis”:

  • “Emerging-Market-Crises – Well-known Models and New Explanations”, (“Emerging Market-Krisen: Bekannte Modelle und neue Ansätze”) in: List Forum für Wirtschafts- und Finanzpolitik, vol.27(2), 2001, pp. 178-193.
  • “Globalization, Financial Stability and Monetary Policy”, in: Empirica, vol. 31, no. 2-3, 2004.
  • “Interdependent Expectations and the Spread of Currency Crises”, in: IMF Staff Papers, vol. 52, no. 1, 2005, pp. 41-54.

5. On “Stability Policy in Japan”:

  • “Alternatives of Disinflation and Stability Policy. Costs, Efficiency and Implementability: A Comparison between Japan and West Germany”, in: Bank of Japan. Monetary and Economic Studies, vol. 7, no. 1, 1989, pp. 41 – 98.

6. On „Transition Countries In General”:

  • “Central Banking in Transition Countries”, in: Eastern European Economics, vol. 38, no. 4, 2000, pp. 6-53.
  • “Controlling Inflation in Transition Economies: On the relevance of central bank independence and the right nominal anchor”, in: Atlantic Economic Journal, vol. 27, no. 1, 2000, pp. 60-70.
  • “Central Bank Independence and the Lessons for Transition Economies from Developed and Developing Countries”, in: Comparative Economic Studies, vol. 41, no. 4, 1999, pp. 1-22.
  • “La banca central en los países en transición”, in: CEMLA Boletín, vol. XLV, 1999, no. 2, pp. 49-75.
  • “Central Banking in Transition Countries”, IMF Working Paper WP/98/126, International Monetary Fund, Washington, D.C., 1998.
  • “Transformation Process and the J-Curve Problem”, in: International Journal of Social Economics’, vol. 23, no. 10/11, 1996, pp. 73 – 87.
  • “Wachstum und Entwicklung. Theorie der Entwicklungspolitik.”, Munich and Vienna: Oldenbourg Verlag, 2nd ed., 1997.
  • “Reconstruction of the Financial System in East Germany: Description and Comparison with Eastern Europe”, in: Journal of Banking and Finance, vol. 17, 1993, pp. 1001 – 1019

“China’s Rebalancing-Dilemma”

Helmut Wagner

in: One Belt and One Road - China and the World, forthcoming, Proceedings of the International Conference held in 2016 at Frankfurt University, Konfuzius-Institut Frankfurt (2017).

Rebalancing means the correction of imbalances built up in the past. After having experienced a great growth success story over the past three decades, China recently announced a rebalancing of its development process. The term “rebalancing” was explicitly used by the Chinese government in its 12th five-year plan (in 2011) and repeated and confirmed in the 13th five-year plan (in 2016). There it was understood as a necessary shift of the Chinese economy from an investment- and export-driven towards a more consumption- and inward-driven growth path. This is a typical development or restructuring process in middle-income countries where the marginal profitability of industrial sector productions starts to decline (against the background of increasing wages in manufacturing and increasing social, economic and ecological side-costs or imbalances of industrialization; see Wagner 2013). Hence there is then a need to initiate the process of de-industrialization or tertiarization (see, ibid). The mentioned side-costs or imbalances in China were already early (in the mid-00s) denounced in country reports of the IMF and other international organizations associated with the call on China to rebalance its economy.

I shall argue that China currently is hit by multiple rebalancing challenges. First, it has to correct old imbalances built up during the past decades during the industrialization process which obviously has been “overdone”. Second, in the process of correcting the old imbalances, “wrong” political decisions (decisions which appeared to be less costly in the short run) have been made that produced new imbalances which have eventually driven the country into a dangerous vicious circle of always producing new needs for rebalancing.