China’s internal and external economic imbalances and fiscal reform *

FAN Gang 1 , WEI Qiang 2 and LIU Peng 3

1National Economic Research Institute, China Reform Foundation
2China Center for Economic Research, Peking University

3Comprehensive Department, Ministry of Commerce
Abstract:
China’s ballooning current account surplus has caused a plethora of adverse effects on the healthy development of its economy. Based on an in-depth analysis of the contributory factors to the swelling current account surplus, this paper purports to demonstrate theoretically and empirically that while the chronic savings-consumption imbalance is an important contributor to China’s huge trade surplus, the fundamental underlying contributor is the income structure and savings structure imbalance stemming from the disproportionate increase in retained earnings relative to stagnant wage bills. Corporate retained earnings keep growing rapidly because corporate profit margins are “overstated” and state-owned enterprises “do not pay dividends.” Only when these issues are resolved at the institutional level can the savings rate be reduced to an appropriate level with domestic demand boosted to eliminate excess trade surpluses and fundamentally fix internal and external economic imbalances.

Key words:
External imbalance, consumption-savings imbalance, SOE dividend payment, fiscal reform

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