A Tale of Two Surplus Countries: China and Germany

  • Yin-Wong CheungEmail author
  • Sven Steinkamp
  • Frank Westermann
Research Article


We analyze current account imbalances through the lens of the two largest surplus countries; China and Germany. We observe two striking patterns visible since the 2007/8 Global Financial Crisis. First, while China has been gradually reducing its current account surplus, Germany’s surplus has continued to increase throughout and after the crisis. Second, for these two countries, there is a remarkable reversal in the patterns of exchange rate misalignment: China’s currency has turned from being undervalued to overvalued, Germany’s currency has erased its level of overvaluation and become undervalued. Our empirical analyses show that the current account balances of these two countries are quite well explained by currency misalignment, common economic factors, and country-specific factors. Furthermore, we highlight the global financial crisis effects and, for Germany, the importance of differentiating balances against euro and non-euro countries.


Currency misalignment Current account surplus Global imbalances Global financial crisis 

JEL Classification

F15 F31 F32 



We would especially like to thank two anonymous referees and the editor for their constructive comments and suggestions, which substantially improved the paper. We also thank Joshua Aizenman, Philippe Bacchetta, Angela Capolongo, Woo Jin Choi, Paul Luk, Xingwang Qian, Kishen S. Rajan, and participants of the Bank of Finland Institute for Economies in Transition (BOFIT) Seminar in Helsinki, as well as the conference on “Current Account Balances, Capital Flows and International Reserves” in Hong Kong for their comments and suggestions. Cheung gratefully thanks The Hung Hing Ying and Leung Hau Ling Charitable Foundation for its support. Westermann thanks BOFIT for its hospitality during the research visit in 2018.


  1. Aizenman J, Sengupta R (2011) Global imbalances: is Germany the new China? A skeptical view. Open Econ Rev 22(3):387–400Google Scholar
  2. Algieri B, Bracke T (2011) Patterns of current account adjustment—insights from past experience. Open Econ Rev 22(3):401–425Google Scholar
  3. Almås I, Grewal M, Hvide M, Ugurlu S (2017) The PPP approach revisited: a study of RMB valuation against the USD. J Int Money Financ 77:18–38Google Scholar
  4. Arghyrou MG, Chortareas G (2008) Current account imbalances and real exchange rates in the euro area. Rev Int Econ 16:747–764Google Scholar
  5. Auer, RA (2014) What drives TARGET2 balances? Evidence from a panel analysis. Econ Policy 29(77):139–197Google Scholar
  6. Bagnai A, Manzocchi S (1999) Current-account reversals in developing countries: the role of fundamentals. Open Econ Rev 10(2):143–163Google Scholar
  7. Bineau Y (2010) Renminbi's misalignment: a meta-analysis. Econ Syst 34(3):259–269Google Scholar
  8. Börsch-Supan A, Reil-Held A, Rodepeter R, Schnabel R, Winter J (2001) The German savings puzzle. Res Econ 55(1):15–38Google Scholar
  9. Bussière M, Fratzscher M, Müller GJ (2006) Current account dynamics in OECD countries and in the new EU member states: an intertemporal approach. J Econ Integr 21:593–618Google Scholar
  10. Ca’Zorzi M, Chudik A, Dieppe A (2012) Thousands of models, one story: current account imbalances in the global economy. J Int Money Financ 31(6):1319–1338Google Scholar
  11. Calderon CA, Chong A, Loayza NV (2002) Determinants of current account deficits in developing countries. BE J Macroeconomics: Contributions to Macroeconomics 2:1Google Scholar
  12. Cavallo E, Eichengreen B, Panizza U (2017) Can countries rely on foreign saving for investment and economic development? Rev World Econ:1–30Google Scholar
  13. Cheung Y-W, Fujii E (2014) Exchange rate misalignment estimates—sources of differences. Int J Financ Econ 19(2):91–121Google Scholar
  14. Cheung Y-W, He S (2019) Truths and myths about RMB misalignment: a meta-analysis. Comp Econ Stud forthcomingGoogle Scholar
  15. Cheung Y-W, Chinn MD, Fujii E (2007) The overvaluation of renminbi undervaluation. J Int Money Financ 26(5):762–785Google Scholar
  16. Cheung Y-W, Chinn MD, Fujii E (2009) Pitfalls in measuring exchange rate misalignment. Open Econ Rev 20(2):183–206Google Scholar
  17. Cheung Y-W, Chinn MD, Qian XW (2012) Are Chinese trade flows different? J Int Money Financ 31(8):2127–2146Google Scholar
  18. Cheung, Y-W, Aizenman J, and Ito H (2016) The interest rate effect on private saving: alternative perspectives. NBER Working Paper #22872Google Scholar
  19. Cheung Y-W, Chinn MD, Nong X (2017) Estimating currency misalignment using the Penn effect: it is not as simple as it looks. International Finance 20(3):222–242Google Scholar
  20. Chinn MD, Ito H (2006) What matters for financial development? Capital controls, institutions, and interactions. J Dev Econ 81(1):163–192Google Scholar
  21. Chinn MD, Prasad ES (2003) Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration. J Int Econ 59(1):47–76Google Scholar
  22. Cooper, RN (2008) Global imbalances: globalization, demography, and sustainability. J Econ Perspect 22(3): 93–112Google Scholar
  23. Corsetti, G, Dedola L, and Leduc S (2018) Exchange rate misalignment, capital flows, and optimal monetary policy trade-offs. CEPR discussion papers #12850, March 2018Google Scholar
  24. Coudert V, Couharde C, Mignon V (2013) On currency misalignments within the euro area. Rev Int Econ 21(1):35–48Google Scholar
  25. Couharde C, Delatte A-L, Grekou C, Mignon V, and Morvillier F (2017) EQCHANGE: a world database on actual and equilibrium effective exchange rates. Working paper CEPII no. 2017–14, 2017Google Scholar
  26. Devereux MB, Genberg H (2007) Currency appreciation and current account adjustment. J Int Money Financ 26(4):570–586Google Scholar
  27. Di Nino V,  Eichengreen B, and Sbracia M (2011) Real exchange rates, trade, and growth: Italy 1861–2011. Quaderni di storia economica (Economic History Working Papers) 10. Bank of Italy.Google Scholar
  28. Duarte P, Schnabl G (2015) Macroeconomic policy making, exchange rate adjustment and current account imbalances in emerging markets. Rev Dev Econ 19(3):531–544Google Scholar
  29. Edwards S (1989) Real exchange rates, devaluation, and adjustment exchange rate policy in developing countries. MIT PressGoogle Scholar
  30. Edwards S (2004) Thirty years of current account imbalances, current account reversals, and sudden stops. IMF Staff Pap 51(1):1–49Google Scholar
  31. Edwards S (2008) On current account surpluses and the correction of global imbalances. In: current account and external Financing, Cowan, Kevin; Edwards, Sebastian and Valdes, Rodrigo O. Santiago: Central Bank of Chile, 2008Google Scholar
  32. Engel C (2011) Currency misalignments and optimal monetary policy: a reexamination. Am Econ Rev 101(6):2796–2822Google Scholar
  33. Feldstein M (2011) The role of currency realignments in eliminating the US and China current account imbalances. J Policy Model 33(5):731–736Google Scholar
  34. Freund C, Pierola MD (2012) Export surges. J Dev Econ 97(2):387–395Google Scholar
  35. Garroway C, Hacibedel B, Reisen H, Turkisch E (2012) The renminbi and poor-country growth. World Econ 35(3):273–294Google Scholar
  36. Giannellis N, Koukouritakis M (2018) Currency misalignments in the BRIICS countries: fixed vs. floating exchange rates. Open Econ Rev 29(5):1123–1151Google Scholar
  37. Gnimassoun B (2017) Exchange rate misalignments and the external balance under a pegged currency system. Rev Int Econ 25(5):949–974Google Scholar
  38. Gnimassoun B, Mignon V (2015) Persistence of current-account disequilibria and real exchange-rate misalignments. Rev Int Econ 23(1):137–159Google Scholar
  39. Gruber JW, Kamin SB (2007) Explaining the global pattern of current account imbalances. J Int Money Financ 26(4):500–522Google Scholar
  40. Haddad M, Pancaro C (2010) Can real exchange rate undervaluation boost exports and growth in developing countries? Yes, but not for long. The World Bank, Economic Premise Google Scholar
  41. Horioka  CY, Junmin W (2007) The determinants of household saving in China: a dynamic panel analysis of provincial data. J Money, Credit, Bank 39(8):2077–2096Google Scholar
  42. Isard P (2007) Equilibrium exchange rates: assessment methodologies. IMF Working Paper No. 7-296. International Monetary Fund, 2007Google Scholar
  43. Kaldor N (1980) The foundations of free trade theory and their implications for the current world recession. In: Unemployment in Western countries, Malinvaud, Edmond and Fitoussi, Jean-Paul (Eds), International Economic Association Publications. Palgrave Macmillan, London, 1980Google Scholar
  44. Karunaratne ND (1988) Macro-economic determinants of Australia’s current account, 1977–1986. Weltwirtschaftliches Archiv 124(4):713–728Google Scholar
  45. Kaya O, Mai H (2019) Why do elderly Germans save? Deutsche Bank research focus, March 5, 2019Google Scholar
  46. Keynes, JM (1941) Memorandum on post war currency policy, September 8, 1941. Reprinted in: the collected writings of John Maynard Keynes. Vol. 25: The Origins of the Clearing Union, 1940–1942, Johnson, Elizabeth and Moggridge, Donald (Eds.), Royal Economic Society, London 1978Google Scholar
  47. Khan MS, Knight MD (1983) Determinants of current account balances of non-oil developing countries in the 1970s: an empirical analysis. Staff Papers 30(4):819–842Google Scholar
  48. Kim S (2001) Effects of monetary policy shocks on the trade balance in small open European countries. Econ Lett 71(2):197–203Google Scholar
  49. Lane PR, Milesi-Ferretti GM (2018) The external wealth of nations revisited: international financial integration in the aftermath of the global financial crisis. IMF Economic Review 66(1):189–222Google Scholar
  50. Lee J, Chinn MD (2006) Current account and real exchange rate dynamics in the G7 countries. J Int Money Financ 25(2):257–274Google Scholar
  51. Li H, Zhang J, Zhang J (2007) Effects of longevity and dependency rates on saving and growth: evidence from a panel of cross countries. J Dev Econ 84(1):138–154Google Scholar
  52. Liesenfeld R, Valle Moura G, Richard J-F (2010) Determinants and dynamics of current account reversals: an empirical analysis. Oxf Bull Econ Stat 72(4):486–517Google Scholar
  53. Liu X (2013) Tax avoidance through re-imports: the case of redundant trade. J Dev Econ 104:152–164Google Scholar
  54. Loayza N, Schmidt-Hebbel K, Servén L (2000) What drives private saving across the world? Rev Econ Stat 82(2):165–181Google Scholar
  55. Ma G, McCauley RN (2014) Global and euro imbalances: China and Germany. China & World Economy 22(1):1–29Google Scholar
  56. Marchetti J, Ruta M, and Teh R (2012) Trade imbalances and multilateral trade cooperation. CESifo Working Paper #4050Google Scholar
  57. Marquez J, Schindler J (2007) Exchange-rate effects on China's trade. Rev Int Econ 15(5):837–853Google Scholar
  58. Masson PR, Bayoumi T, Samiei H (1998) International evidence on the determinants of private saving. World Bank Econ Rev 12(3):483–501Google Scholar
  59. Mattoo A, Subramanian A (2009) Currency undervaluation and sovereign wealth funds: a new role for the World Trade Organization. World Econ 32(8):1135–1164Google Scholar
  60. Moral-Benito E, Roehn O (2016) The impact of financial regulation on current account balances. Eur Econ Rev 81:148–166Google Scholar
  61. Qin D, He X (2011) Is the Chinese currency substantially misaligned to warrant further appreciation? World Econ 34(8):1288–1307Google Scholar
  62. Sinn, H-W (2007) Can Germany be saved? The malaise of the world's first welfare state. MIT Press: CambridgeGoogle Scholar
  63. Sinn, H-W (2014) The euro trap: on bursting bubbles, budgets, and beliefs. Oxford University Press: OxfordGoogle Scholar
  64. Sinn H-W, Wollmershäuser T (2012) Target loans, current account balances and capital flows: the ECB’s rescue facility. Int Tax Public Financ 19(4):468–508Google Scholar
  65. Staiger RW, Sykes AO (2010) Currency manipulation’and world trade. World Trade Rev 9(4):583–627Google Scholar
  66. Steinkamp S, Westermann F (2014) The role of creditor seniority in Europe's sovereign debt crisis. Econ Policy 29(79):495–552Google Scholar
  67. Svensson LEO, Razin A (1983) The terms of trade and the current account: The Harberger-Laursen-Metzler effect. J Polit Econ 91(1):97–125Google Scholar
  68. Unger R (2017) Asymmetric credit growth and current account imbalances in the euro area. J Int Money Financ 73:435–451Google Scholar
  69. Williamson J (1983) The exchange rate system, policy analyses in international economics 5. Washington DC: Institute for International EconomicsGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.City University of Hong KongKowloon TongHong Kong
  2. 2.Institute of Empirical Economic ResearchOsnabrück UniversityOsnabrückGermany

Personalised recommendations