Is China’s Current Account Surplus Persistent? Implications for Global Imbalances

Abstract

In this article, we aim to contribute to the debate on global imbalances by assessing whether China’s current account surplus is persistent in the long run by examining the mean-reverting property of current account balance to GDP ratio. To this end, we employ advanced time series techniques which aim to capture nonlinear dynamics in a current account balance and structural breaks in the data generation process. Furthermore, in order to analyze how the global financial crisis has affected the current account dynamics of China, we consider two distinct sample periods as “before” and “after” the crisis eras. Our findings, which are robust to various testing procedures, reveal that current account balance of China follows a nonstationary process under all eras suggesting that current account balance of China is not on a sustainable path. This finding has implications for both the Chinese economy and the likely evolution of global imbalances. As China implements new policies to reduce underlying distortions in its economy, its current account surplus may decline even further and this may help global imbalances to narrow.