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Structural Changes in China–US External Flow of Funds: Statistical Estimates Based on the VEC Model

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Global Flow of Funds Analysis

Abstract

This study constructs an analytical framework of the external flow of funds (EFF) to observe the process and obstacles of China and the United States (US) decoupling, examining the China–US structural relationship in savings and investment imbalance during 1980–2022. We observe the issues between China and the US in the external financial assets and liabilities by stock data, focusing on the external adjustment mode in 2008–2022. We construct a vector error correction model to calculate the quantitative relationship between short-term fluctuations and long-term trends of the EFF in China and the United States and explore the basic causes of economic conflicts between the two sides. This chapter discusses the risk of China–US economic decoupling and US debt, the strategic challenges both sides face, and the prospect of countermeasures.

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Notes

  1. 1.

    NPR (2012), https://www.npr.org/2012/06/16/154997482/follow-the-money-on-the-trail-of-watergate-lore.

  2. 2.

    IMF (2021), Coordinated Direct Investment Survey (CDIS), https://data.imf.org/regular.aspx?key=60564262.

  3. 3.

    According to the Balance of Payments and International Investment Position Manual (BPM6), the Current Account + Capital account − Financial Account + error or omission = 0. To highlight the main relationship between external physical transactions and financial transactions, capital account, and error terms are omitted here.

  4. 4.

    Feldstein-Horioka (1980).

  5. 5.

    The US Department of the Treasury, Treasury International Capital System http://www.ustreas.gov/tic/.

  6. 6.

    The data in this table include foreign holdings of US Treasury marketable and non-marketable bills, bonds, and notes reported monthly under the Treasury International Capital reporting system. The data for 2022 is in August, while the data for other years are in December.

  7. 7.

    Gourinchas et al. (2017) and Mc Cauley (2015).

  8. 8.

    Iwamoto (2013) and Gourinchas et al. (2019).

  9. 9.

    The federal funds rate refers to the short-term interest rate in the US interbank lending market. The change in such interest rates can sensitively reflect the surplus and shortage of funds between banks. The surplus and shortage of funds in the interbank lending market will spread to the market industry and commerce, affecting consumption, investment, and balance of payments.

  10. 10.

    At the end of 2022, data from IMF’s IIP indicates that France and the UK had net external assets of −9.08 billion USD and −9.96 billion USD.

  11. 11.

    Data from the US Bureau of Economic Analysis, BOP.

  12. 12.

    According to the definition of BOP, investment income refers to the income generated by holding foreign financial assets. They include interest income, dividends, returns from overseas subsidiaries to the home company, and reinvestment returns from foreign direct investors. Specific items can be divided into direct investment income, securities investment income, and other investment income.

  13. 13.

    For example, Obstfeld and Rogodd (2005) and Iwamoto (2007, 2012).

  14. 14.

    Gourinchas and Rey (2007a, 2007b) and Mc Cauley (2015).

  15. 15.

    IMF (2022), CDIS, CPIS; BIS’s LBS, http://stats.bis.org/statx/toc/LBS.html on March 3 22, 2023.

  16. 16.

    IMF, World Economic Outlook Database October 2023.

  17. 17.

    The national Bureau of Statistics of China, China Statistical Yearbook (2021).

  18. 18.

    IMF (the end of 2022), CPIS, and CDIS; BIS (the end of 2022) Locational banking statistics.

  19. 19.

    Hamilton (1790).

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Authors and Affiliations

  1. Hiroshima Shudo University, Hiroshima, Japan

    Nan Zhang

  2. Cornell University, New York, NY, USA

    Yiye Zhang

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  1. Nan Zhang
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Correspondence to Nan Zhang .

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Zhang, N., Zhang, Y. (2024). Structural Changes in China–US External Flow of Funds: Statistical Estimates Based on the VEC Model. In: Global Flow of Funds Analysis. Springer, Singapore. https://doi.org/10.1007/978-981-97-1029-4_3

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