Skip to main content

Advertisement

SpringerLink
Log in

China’s Growth, Stability, and Use of International Reserves

  • Research Article
  • Published:
Open Economies Review Aims and scope Submit manuscript

Abstract

Since the onset of the global financial crisis, China and the U.S. have reduced their current-account imbalances as a share of GDP to less than half their pre-crisis levels. For China, the reduction in its current-account surplus post-crisis suggests a structural change. Panel regressions for a sample of almost 100 countries over 1983–2013 confirm that the relationship between current-account balances and economic variables changed in important ways after the financial crisis. China’s rebalancing has been accompanied by a decline in its reserves-to-GDP ratio and greater outward FDI that, in turn, has mitigated reserve hoarding.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9

Similar content being viewed by others

Notes

  1. Caballero et al. (2008), Ju and Wei (2010) and others explored this interpretation in models with FDI and global imbalances.

  2. While the mercantilist motive for hoarding international reserves played a significant statistical role in accounting for the behavior in international reserves/GDP during the period 1980–2000, the precautionary motive was more important economically.

  3. Feenstra and Hong (2010) raised questions about the efficacy and sustainability of export-led growth in China as the way to increase future employment. They calculated that export growth over the period 2000–2005 could explain the entire increase in China’s employment over that period, but comparable employment gains could have been achieved by growing domestic demand.

  4. Aizenman and Jinjarak (2009) captured empirically the asymmetric effect of the U.S. as the “demander of last resort.” For the period 1981–2006, a 1 % increase in the lagged US current-account deficit was associated with a 0.5 % increase in the current-account surpluses of surplus countries. They projected a sizable drop in China’s current-account surpluses after 2006, possibly falling to 1 % of China’s GDP by 2013 in a “worst-case scenario” where all conditioning variables deteriorated by one standard deviation.

  5. WSJ, December 19, 2013 reported, “Beijing will ease the approval process for all but the largest Chinese investments in overseas companies and projects, a major relaxation of regulatory oversight that analysts say is aimed at encouraging Chinese firms to expand abroad.”

  6. We also consider the role of liquidity, captured by bank lending to the public and private sectors as a share of GDP, in one version of our estimation. Including the liquidity variable reduces the number of countries in the sample from 95 to 83.

  7. An F-test reveals that the correlation in the post-crisis period is significant; F = 9.80, Prob > F = 0.0022.

  8. In one version we added the growth of domestic credit as a share of GDP as a regressor and interacted it with the time dummy. Including the domestic credit variable reduces the country sample from 95 to 83. The correlation of the current-account surplus and the growth of domestic credit is positive and significant in the pre-crisis period only for the non-surplus countries and the correlation in the post-crisis period is not significantly different from the one in the pre-crisis period.

  9. See Yang (2012) for further discussion of possible adjustment modes in China.

References

  • Aizennman J, Pasricha G (2013) Why do emerging markets liberalize capital outflow controls? Fiscal versus net capital flows concerns. J Int Money Financ 39(1):28–64

    Article  Google Scholar 

  • Aizenman J, Marion N (2003) The high demand for international reserves in the Far East: what’s going on? J Jpn Int Econ 17:370–400

    Article  Google Scholar 

  • Aizenman J, Marion N (2004) International reserve holdings with sovereign risk and costly tax collection. Econ J 114:569–591

    Article  Google Scholar 

  • Aizenman J, Jinjarak Y (2009) The USA as the ‘demander of last resort’ and the implications for China’s current account. Pac Econ Rev 14(3):426–442

    Article  Google Scholar 

  • Aizenman J, Lee J (2007) International reserves: precautionary versus mercantilist views, theory and evidence. Open Econ Rev 18(2):191–214

    Article  Google Scholar 

  • Aizenman J, Lee J (2008) Financial versus monetary mercantilism–long-run view of large international reserves hoarding. World Econ 31(5):593–611

    Article  Google Scholar 

  • Aizenman J, Sun Y (2010) Globalization and the sustainability of large current account imbalances: size matters. J Macroecon 32(1):35–44

    Article  Google Scholar 

  • Alfaro L, Kalemli-Ozcan S, Volosovych V (2011) Sovereigns, upstream capital flows and global imbalances, NBER Working Paper No. 17396

  • Caballero R, Farhi E, Gourinchas P-O (2008) An equilibrium model of global imbalances and low interest rates. Am Econ Rev 98(1):358–393

    Article  Google Scholar 

  • Chinn MM, Prasad ES (2003) Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration. J Int Econ 59:47–76

    Article  Google Scholar 

  • Choi I (2001) Unit root tests for panel data. J Int Money Financ 20:249–272

    Article  Google Scholar 

  • Dooley M, Folkerts-Landau D, Garber P (2003) An essay on the revived bretton woods system, NBER Working Paper No. 9971, Published in (2004) as the revived bretton woods system. Int J Financ Econ 9:307–13

    Article  Google Scholar 

  • Dooley M, Folkerts-Landau D, Garber P (2004) The US current account deficit and economic development: collateral for a total return swap, NBER Working Paper No. 10727

  • Dooley M, Folkerts-Landau D, Garber P (2005) Direct investment, rising real wages and the absorption of excess labor in the periphery, in G7 current account imbalances: sustainability and adjustment. National Bureau of Economic Research, Cambridge

    Google Scholar 

  • Eichengreen B (2007) Global imbalances and the lessons of Bretton Woods. MIT, Cambridge

    Google Scholar 

  • Feenstra R, Hong C (2010) China’s exports and employment. In: Feenstra R, Wei S-J Wei (eds) China’s Growing Role in World Trade. NBER and University of Chicago Press

  • Feldstein M (2008) Resolving the global imbalance: the dollar and the U.S. saving rate. J Econ Perspect 22(3):113–25

    Article  Google Scholar 

  • Gruber JW, Kamin SB (2007) Explaining the global pattern of current account imbalances. J Int Money Financ 26:500–22

    Article  Google Scholar 

  • Jeanne O (2007) International reserves in emerging market countries: too much of a good thing? Brook Pap Econ Act Economic Studies Program, The Brookings Institution 38(1):1–80

    Article  Google Scholar 

  • Ju J, Wei S-J (2010) Domestic institutions and the bypass effect of financial globalization. Am Econ J Econ Policy 2(4):173–204

    Article  Google Scholar 

  • Obstfeld M, Rogoff K (2005) Global current account imbalances and exchange rate adjustments. Brook Pap Econ Act 1:67–123

    Article  Google Scholar 

  • Smith, A (1776). An inquiry into the nature and causes of the wealth of nations

  • Yang DT (2012) Aggregate savings and external imbalances in China. J Econ Perspect 26(4):125–146

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics and International Relations, University of Southern California, Los Angeles, CA, USA

    Joshua Aizenman

  2. Department of Financial and Management Studies, University of London, London, England, UK

    Yothin Jinjarak

  3. Department of Economics, Dartmouth College, Hanover, NH, USA

    Nancy P. Marion

Authors
  1. Joshua Aizenman
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Yothin Jinjarak
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Nancy P. Marion
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Joshua Aizenman.

Additional information

Useful comments by George Tavlas, Jaejoon Woo, and the participants at the 2014 Philadelphia AEA meeting are gratefully acknowledged. Any errors are ours.

Joshua Aizenman is grateful for the support provided by the Dockson Chair in Economics and International Relations, USC.

Appendix

Appendix

1.1 Data Description

Current Account/GDP:

Current-account balance as a percentage of GDP. Source: EIU.

International Reserves/GDP:

Total reserves (excluding gold), including foreign exchange, reserve position with the IMF and SDRs at end-period. Source: Economist Intelligent Unit (EIU).

Real GDP Growth:

Percentage change in real GDP (constant USD), over previous year (based on Gross domestic product (GDP) at constant market prices, rebased to 2005 constant prices and translated into US$ using local currency:$ PPP exchange rate in 2005.). Source: EIU.

World GDP:

World’s Gross domestic product at purchasing power parity (PPP) in US$. Source: EIU.

Inward FDI:

Stock of direct investment by non-residents into the country, as a percentage of GDP.

Outward FDI:

Stock of direct investment capital by domestic residents out of the country, as a percentage of GDP.

GDP per Head

GDP at purchasing power parity (PPP), divided by population. Source: EIU.

Exports of Natural Resources:

Exports of fuel and minerals as percentage of GDP. Source: World Development Indicators (WDI).

Real Exchange Rate Appreciation:

Trade-weighted basket of currencies converted to an index (1997 = 100) and adjusted for relative price movements. Source: EIU.

Trade/GDP:

[Exports + Imports]/GDP ratio. Source: EIU.

Domestic Credit/GDP:

(Bank lending to public and private sectors)/GDP

Stock of Public Debt/GDP:

Total debt domestic, external owed by central government (both local and foreign currency) to domestic residents, foreign nationals and multilateral institutions such as the IMF, expressed as a percentage of GDP.

US Demand:

Current-account deficit as percentage of GDP. Source: EIU.

1.2 List of Countries

Countries included in the estimation (95):

Argentina (AR), Austria (AT), Australia (AU), Azerbaijan (AZ), Bangladesh (BD), Belgium (BE), Bahrain (BH), Burundi (BI), Bolivia (BO), Botswana (BW), Belize (BZ), Canada (CA), Switzerland (CH), Cote D’Ivoire (CI), Chile (CL), Cameroon (CM), China (CN), Colombia (CO), Costa Rica (CR), Cuba (CU), Germany (DE), Denmark (DK), Dominican Republic (DO), Algeria (DZ), Ecuador (EC), Estonia (EE), Egypt (EG), Spain (ES), Ethiopia (ET), Finland (FI), Fiji (FJ), France (FR), Gabon (GA), United Kingdom (GB), Ghana (GH), Greece (GR), Guatemala (GT), Honduras (HN), Croatia (HR), Hungary (HU), Indonesia (ID), Ireland (IE), India (IN), Iceland (IS), Italy (IT), Jamaica (JM), Jordan (JO), Japan (JP), Kenya (KE), Korea, Rep. Of (KR), Kuwait (KW), Kazakhstan (KZ), Sri Lanka (LK), Lithuania (LT), Luxembourg (LU), Latvia (LV), Morocco (MA), Moldova (MD), Macedonia (MK), Malawi (MW), Mexico (MX), Malaysia (MY), Namibia (NA), Nigeria (NG), Nicaragua (NI), Netherlands (NL), Norway (NO), New Zealand (NZ), Panama (PA), Peru (PE), Papua New Guinea (PG), Philippines (PH), Pakistan (PK), Portugal (PT), Paraguay (PY), Qatar (QA), Romania (RO), Russian Federation (RU), Saudi Arabia (SA), Sudan (SD), Sweden (SE), Singapore (SG), El Salvador (SV), Syrian Arab Republic (SY), Thailand (TH), Tunisia (TN), Turkey (TR), Trinidad & Tobago (TT), Tanzania (TZ), Ukraine (UA), United States (US), Venezuela (VE), Yemen (YE), South Africa (ZA), Zambia (ZM).

Countries excluded from the estimation due to data availability (76):

Afghanistan (AF), Anguilla (AI), Antigua (AG), Aruba (AW), Bahamas (BS), Bermuda (BM), Bhutan (BT), Brunei (BN), Bulgaria (BG), Burkina Faso (BF), Cambodia (KH), Cape Verde (CV), Cayman Islands (KY), Central African Republic (CF), Chad (TD), Comoros (KM), Congo, Democratic Republic Of (CD), Cook Islands (CK), Czech Republic (CZ), Djibouti (DJ), Dominica (DM), Eritrea (ER), Georgia (GE), Grenada (GD), Guinea (GN), Guinea-Bissau (GW), Guyana (GY), Haiti (HT), Iran (IR), Iraq (IQ), Kiribati (KI), Kyrgyz Republic (KG), Laos (LA), Lesotho (LS), Liberia (LR), Macau (MO), Madagascar (MG), Marshall Islands (MH), Mauritania (MR), Micronesia, Fed. States Of (FM), Mongolia (MN), Montserrat (MS), Nauru (NR), Nepal (NP), Netherlands Antilles (AN), New Caledonia (NC), Niger (NE), North Korea (KP), Palau (PW), Palestinian Territory (PS), Puerto Rico (PR), Rwanda (RW), Saint Kitts And Nevis (KN), Saint Lucia (LC), Saint Vincent And The Grenadines (VC), Samoa (WS), Seychelles (SC), Slovakia (SK), Senegal (SN), Solomon Islands (SB), Somalia (SO), Suriname (SR), Swaziland (SZ), Taiwan (TW), Tajikistan (TJ), The Gambia (GM), Timor-Leste (TL), Togo (TG), Tonga (TO), Turkmenistan (TM), Turks & Caicos Islands (TC), Tuvalu (TV), Uganda (UG), Uzbekistan (UZ), Vanuatu (VU), Virgin Islands, British (VG).

Table 8 Summary statistics of the data
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Aizenman, J., Jinjarak, Y. & Marion, N.P. China’s Growth, Stability, and Use of International Reserves. Open Econ Rev 25, 407–428 (2014). https://doi.org/10.1007/s11079-014-9308-x

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11079-014-9308-x

Keywords

Search

Navigation