Why Does China as a Developing Country Run a Current Account Surplus

Why does China as A Developing Country Run A Large Current Account Surplus?

To answer this question, I am first going to describe how the balance of payment works. The balance of payments can be divided into the current account, the financial account and the capital account. The current account is comprised of the trade account (all the exports or imports of goods), the services (payments for legal assistance, tourists expenditures, and shipping fees), and income (international interest and dividend payments and the earnings of domestically owned firms operating abroad). While the capital account records asset transfers, the financial account measures the differences between sales of assets to foreigners and purchases of assets located abroad. From a Chinese perspective, a financial inflow would be when foreigners give loans to the Chinese while a financial outflow would be when foreigners purchase assets from the Chinese. It should be noted however that a current account surplus should be offset by a financial account or capital account deficit.

China’s economy is really different from that of America. It can be shown that China’s saving rate is higher than its investing rate, which means that its financial account is running a surplus. Savings kept by households, private and public corporations are remarkably high (15% of GDP in 2006) due to reduced social welfare arrangements, lack of pensions for households, low wages and absence of taxes for companies. Also, the demographics theory suggests that the high number of Chinese of working age during the 1990s and 2000s resulted in high growth and high savings. On the other hand, China’s exports are greater than imports as China is deeply locked into the international production networks as a processor and assembler. Because of China’s key position in the global division of labor, the whole world needs China to assemble and process all kinds of devices. In 2005, China’s total trade surpassed US$1 trillion, and accounted for more than 70% of GDP. In 2005, China experienced a decrease in import growth and an increase in heavy industrial products export such as aluminum, machine tools, cement, key chemical products, and especially steel. This was the result of a domestic investment boom for such products. This extra revenue brought about by exports and various investments seems to fuel China’s savings, making China’s surplus even higher. As China became a member of the World Trade Organization in 2003, the dramatic increase in China’s exports was also fueled by the increasingly attractive investment climate for export-oriented products and ever-improving productivity in the labor-intensive export sector.

In addition to the reasons we have discussed above, the role of the government is really important in explaining the current account surplus. The Chinese government has maintained internal balance through