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A Tale of Two Surplus Countries: China and Germany

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

Abstract

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.

Keywords

Currency misalignment Current account surplus Global imbalances Global financial crisis 

JEL Classification

F15 F31 F32 

Notes

Acknowledgments

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.

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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

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