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A Tale of Two Surplus Countries: China and Germany


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.

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  1. 1.

    Edwards (2004, 2008) are among the few studies on the issue. Bagnai and Manzocchi (1999) further point out that upward and downward shifts in the current account are affected by different fundamental variables. This difference merits a fresh view on the surplus economies.

  2. 2.

    In 2018, Christine Lagarde specifically addressed Germany’s role in reducing global imbalances in the post-crisis period: “We need to ask why German households and companies save so much and invest so little, and what policies can resolve this tension” (Speech at the joint IMF-BBk conference “Germany-Current Economic Policy Debates”, January 2018).

  3. 3.

    In 2015, China’s surplus was USD 304.2 bn., while that of Germany was USD 288.2 bn. The US deficit in the same year was USD 434.6 bn., accounting for 35% of the world’s current account deficits.

  4. 4.

    Since China’s current account surplus started bourgeoning at the beginning of the twenty-first century, its foreign exchange policy has been scrutinized and criticized. The US is arguably the most vocal critic and threatens to impose various retaliation measures including the 2005 Schumer–Graham bipartisan bill that proposes to impose an across the board tariff on all imports from China to force China to stop currency manipulation. More recently, also Germany has been in the focus of criticism, both vis-a-vis the US and its European trading partners.

  5. 5.

    Ma and McCauley (2014) compares the evolution processes of the Chinese and German imbalances.

  6. 6.

    For China, Giannellis and Koukouritakis (2018) is an exception.

  7. 7.

    Currency undervaluation and the resulting misalignment lead to contentious policy debate and academic discussions (Mattoo and Subramanian 2009; Staiger and Sykes 2010; Marchetti et al. 2012; Engel 2011; Corsetti et al. 2018). Engel (2011), for example, argues that maintaining the exchange rate at its fundamental equilibrium level should be an additional independent policy objective of central banks.

  8. 8.

    For instance, Hans-Jürgen Schmahl, the former member of the German Council of Economic Experts criticized the German overvaluation (“Die teure D-Mark behindert deutsche Exporteure – vor allem in Europa”, Die Zeit, April 16th, 1993).

  9. 9.

    See also Almås et al. (2017) and Cheung et al. (2017). Note that there is a considerable degree of sampling uncertainty associated with currency misalignment estimates. For the renminbi it has been discussed, for example, by Cheung et al. (2007, 2009), Qin and He (2011), and Garroway et al. (2012).

  10. 10.

    “Why Germany’s current-account surplus is bad for the world economy”, The Economist, July 8th, 2017.

  11. 11.

    Some studies examine the real effective exchange rate effect on current account balances; see, for example, Khan and Knight (1983), Edwards (1989), Lee and Chinn (2006), and Arghyrou and Chortareas (2008). Some studies consider currency misalignment instead of real effective exchange rate; see, for example, Freund and Pierola (2012), Algieri and Bracke (2011), Di Nino et al. (2011), and Haddad and Pancaro (2010). Gnimassoun and Mignon (2015) and Gnimassoun (2017) suggest that the use of currency misalignment measures alleviates endogeneity concerns.

  12. 12.

    In 2005, China modified its exchange rate policy from a de facto dollar peg to a “managed floating exchange rate regime,” which put the RMB on a gradual appreciation path. China replaced the managed float with a stable RMB/dollar rate policy in the midst of the global financial crisis, reestablished the managed float and allowed the RMB to appreciate in 2011. In 2015, China revamped its RMB central parity formation mechanism to enhance the role of market forces. In the same year, the IMF indeed stated that the RMB is at a level that is no longer undervalued in its Article IV consultation mission press release. Over time, China, either because of domestic or external considerations, has loosened its grip on the RMB and led to changes in the misalignment pattern.

  13. 13.

    For some observers, the limited role of currency misalignment in China in the pre-crisis period may appear surprising, as there is an abundance of news reports on the alleged use of currency misalignment to stimulate exports. However, it is not uncommon that academic studies reported the Chinese exports and imports do not follow the textbook exchange rate effects and do not empirically satisfy the Marshall-Lerner condition (Cheung et al. 2012; Devereux and Genberg 2007; Marquez and Schindler 2007), and that the Renminbi misalignment estimate can span a wide range that covers both under- and overvaluation (Bineau 2010; Cheung and He 2019).

  14. 14.

    Compared to the Aizenman and Sengupta (2011) specification, there are several contributions. First, we extend the sample period beyond the global financial crisis and obtain additional insight about the evolution of current account balances after the crisis. Secondly, the use of currency misalignment instead of real exchange rates as an important explanatory factor alleviates endogeneity concerns. Third, we include additional controls (e.g. China- and Germany-specific factors), and, fourth, we consider a full multivariate specification.

  15. 15.

    The beginning of the sample period is mainly determined by the availability of Chinese data. We consider the same sample period for both China and Germany to facilitate the joint estimation and comparison.

  16. 16.

    See Couharde et al. (2017) for a detailed discussion of the database.

  17. 17.

    A comparison of alternative methods of estimating equilibrium exchange rates and the corresponding misalignment estimates is given by, for example, Isard (2007) and Cheung and Fujii (2014).

  18. 18.

    The literature covers a diverse set of determinants of current account balances. Our choices are based on existing studies including Ca’Zorzi et al. (2012), Algieri and Bracke (2011), Karunaratne (1988), Calderon et al. (2002), Chinn and Prasad (2003), Gruber and Kamin (2007), Liesenfeld et al. (2010), Aizenman and Sengupta (2011), Duarte and Schnabl (2015), Unger (2017).

  19. 19.

    Results obtained from alternative choices of crisis years for the dummy variable are available upon request. Among the alternative crisis variables, the Crisis07 dummy variable yields the highest R-squares and, thus, is used in all subsequent regressions.

  20. 20.

    Analytically, Devereux and Genberg (2007), for example, show that an RMB depreciation will have an immediate reverse effect and little short-run effect on the current account balance.

  21. 21.

    The (total) age dependency variable, which is the sum of the young and old age dependency variables is not included to avoid multicollinearity.

  22. 22.

    Other empirical studies on the determinants of the current account came up with similarly mixed results. While, for example, Gruber and Kamin (2007)  mostly found negative coefficients for both, the young and old age dependency ratio, Aizenman and Sengupta (2011) report heterogeneous results across the two countries and their age profiles.

  23. 23.

    Similarly, Horioka et al. (2007) report a positive old-age dependency effect in Chinese saving data.

  24. 24.

    For Germany, the statistically insignificant old-age dependency ratio is not surprising given the well-documented non-standard saving behavior of Germans. Börsch-Supan et al. (2001), for instance, document the “German savings puzzle” of relatively flat saving rates across age profiles in Germany. A recent study by the Deutsche Bank even finds the savings rate to increase in the second half of retirement. According to survey data, two motives stand out in explaining this finding: i) German retirees are eager to hedge longevity risk and ii) more than half of them would prefer passing their savings to descendants rather than consuming it by themselves (Kaya and Mai 2019).

  25. 25.

    The signs of the estimated coefficients are largely consistent with earlier theoretical or empirical studies (Chinn and Prasad 2003; Gruber and Kamin 2007; Bussière et al. 2006; Svensson and Razin 1983; Masson et al. 1998; Ca’Zorzi et al. 2012; Kim 2001; Aizenman and Sengupta 2011).

  26. 26.

    To account for the effect of a slowdown in global growth after the GFC, we considered adding an interaction term of the global growth variable with our crisis dummy. For both countries, the interaction term is insignificant, and its inclusion does not change our main results. These results are not reported for brevity but are available upon request.

  27. 27.

    The theoretical effects of these variables are mostly ambiguous. Expansionary monetary policy may exert expenditure-switching and opposing income-absorption effects. Monetary aggregates are, furthermore, often considered to be proxies of financial depth. Empirically, Kim (2001) finds positive short-term effects on the trade balance (of small open) economies. The coefficients of the inflation and real interest rate variables are in line with what the savings literature surmises (Loayza et al. 2000; Masson et al. 1998).

  28. 28.

    In passing, we note that the residual estimates of these specifications a) pass the stationarity test; that is, we cannot reject the hypothesis that they are stationary, and b) pass the serial correlation test; that is, we cannot reject the hypothesis that these residuals are not serially correlated. The results are available upon request.

  29. 29.

    In addition to the two robustness exercises reported below, we assessed whether trade barriers play a marginal effect. However, as reported in Table B1 of Appendix B, neither the average tariff rates nor the accession to the WTO help to explain these two countries’ current account balances.

  30. 30.

    We also experimented with other CEPII estimates based on i) a smaller set of fundamental variables (i.e. relative sectoral productivity alone, or relative sectoral productivity and net foreign assets), ii) a smaller set of trade partners (top-30), and iii) time-varying trade weights based on a rolling 5-year window. Regarding the estimates by Cheung et al. (2017), we alternatively included pooled estimates over all income groups and quadratic regression equations (instead of linear regressions, separately estimated for developing and developed countries). The results are remarkably robust across these choices (with minor exceptions) and are available upon request.

  31. 31.

    Studies analyzing the link between real effective exchange rates and the current account balances include, for example, Khan and Knight (1983), Edwards (1989), Lee and Chinn (2006), and Arghyrou and Chortareas (2008).

  32. 32.

    China established the export tax rebate policy in 1985 and implemented the “full refund” in 1988. See Liu (2013) and references therein for the evolution of China’s export VAT rebate policies.

  33. 33.

    The insignificant financial liberalization effect is likely attributed to the fact that the Chinn-Ito index is an aggregate measure of financial openness. Different aspects of financial regulations can have opposing effects on the current account (Moral-Benito and Roehn 2016).

  34. 34.

    On the development of misalignment within the euro area see, for example, Coudert et al. (2013).


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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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Appendix 2: Additional Figures and Regression Results

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Cheung, YW., Steinkamp, S. & Westermann, F. A Tale of Two Surplus Countries: China and Germany. Open Econ Rev 31, 131–158 (2020).

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  • Currency misalignment
  • Current account surplus
  • Global imbalances
  • Global financial crisis

JEL Classification

  • F15
  • F31
  • F32