Recently, I was in Shanghai to attend a research symposium led by Harvard’s President Drew Faust. Participants included the university’s best and brightest China-hands as well as luminaries from among China’s elite academia. Deliberations took on “The Chinese Century?” “China: Dynamic, Important, and Different,” “The Moral Limits of Markets,” “Managing Crises in China,” and much more. I came away wiser. Indeed, there is so much happening in China to experience, understand, and learn. Visiting Shanghai and Beijing, you cannot but feel China is under siege for running external payments surpluses.
A consequence—argued by politicians and others in the United States and Europe—of China’s rigid exchange rate regime. The debate is as fierce as it is emotional. Of late, China is strongly criticized for artificially depressing (even manipulating) the value of its currency, renminbi (RMB), or yuan, to the detriment of its trading partners. Indeed, Nobel Laureate Paul Krugman even contended that China had since taken millions of jobs globally, especially from the United States.2 To really understand requires going back to fundamentals. What caused China’s recent balance of payments (BOP) surpluses?
Causes of Imbalance
For China, BOP surpluses are a relatively recent phenomenon. It used to have persistent deficits in the second half of 1980s. Surpluses only came in the early 1990s and rose sharply since 2004 (3.5 percent of gross ...