Review ‘An End to China’s Imbalances’

Content

1. Introduction 3 2. Summary 3 2.1 Aim and Objectives of This Paper 3 2.2 Driving factors 4 2.3 Domestic Context 5 2.4 Empirical Analysis and Outlook 6 3. Appraisal 6 3.1 Strengths of This Paper 7 3.2 Limitations of This Paper 7 4. Conclusion 8 Reference 8

Introduction
The recent fall in China’s external surplus have significant influences on China’s economy and global economy. From a global point of view, the reduction of China current account surplus has not doubt relieved the possibility of crash of US financial asset in the future. From the domestic view for China, the reduction of surplus adversely influenced the national economy because the economy of China relies heavily on the international trade and global market. This essay therefore aims to review and appraise the paper of Ahudja et al (2012) who try the figure out the driving factors of the fall in China’s surplus. The rest of this essay is organized as follows. Section 2 summarizes the main findings of Ahudja et al (2012). Section 3 provides an appraisal for this paper by considering the strengths and limitations. Section 4 concludes.
Summary
Aim and Objectives of This Paper
This paper aims to explain the recent fall in China’s external surplus by examining the driving factors of this shrinkage under a broad economic, policy, and demographic context of China. A revised outlook is provided as well based on the analyses. This paper is begun with an overall description for global current account imbalances among major economies. The low saving rate and high consumption growth in US is supported mainly by high current account deficit. Trade partners of US, including Germany, Japan, oil producers, and China, have accumulated a large net foreign asset position and surplus. This imbalance is considered as unsustainable by the Bretton Woods II proponents who predict a crash of US financial assets. However, the recent great recession is resulted from failures of risk management and financial regulation rather from a deteriorated international trade environment. Because of this great recession, the external good demand decreased and saving rate increased. The balloon of US deficit stopped to expand before explosion. Under this global economic context, the surplus of China’s current account dropped significantly, nearly a half, from 2007 to 2009. This significant decline of current account surplus is explained in section III of the paper by referring to global and domestic factors.
Driving factors
Global Factors
The global factors include the collapse in global demand, increasing price of commodities, and decreasing price of capital goods. The collapse in global demand is mainly resulted from the recent global economic recession. This recession was mainly due to the excessive consumption and leverage. The sudden drop of GDP in Europe and us reduced both the demand for consumption and capital goods. The machinery and equipment imported by US from China dropped from 10−15 percent of China’s overall export growth in the early 2000s to around 5 percent in the post crisis period. The global competition environment tends to be increasingly fierce. Commodities and raw materials are imported for government investment. This supply for these goods is inelastic. High demand for the commodities and raw materials under stimulus policy to deal with recession pushed up the import prices. In the export market, capital goods are facing more competition which usually leads to adversely position.
Domestic Factors
The domestic factors include increase in investment, structural change of exports, and weakening position of trade term. As mentioned above, China proposed a basket of stimulus policy to offset the reduction in external demand. The investment to GDP increased from 42 in the pre-crisis period to 47 in the year after the crisis. These investments in stimulus package were mainly to