Readers Question: hi, i just want to ask about the reasons behind the Chinese current account surplus and the solutions that can be done.
The Chinese current account surplus is very large. In 2007, $371 billion. Reasons for this Surplus
- High saving rate in China. Chinese consumers have a higher propensity to save than the rest of the world. This means they save rather than buy imports from abroad. The US has a very low savings rate and so US consumers have been buying Chinese imports
- Undervalued Yuan. It has been the policy of China to keep the value of the Chinese Yuan low. True it has appreciated but, less than if market forces had fully operated. The lower value of the Yuan keeps exports cheaper and imports more expensive.
- Shifting Comparative Advantage. China has developed a significant comparative advantage in manufactured goods which encourages a trade surplus.
Solutions to Current Account Surplus
- Allow Yuan to Appreciate. Making exports more expensive, imports cheaper.
- Encourage greater consumer spending and less reliance on exports. This may be necessary to maintain Chinese economic growth.
- The deficit may narrow as the West (US in particular spends less on imports due to recession.)
See also: Causes of Current account deficit