If the global imbalances resulted from the excess liquidity created by reserve currency countries – particularly the United States, through its expansionary monetary and fiscal policies and its housing finance policies – rather than a global savings glut brought about by the economic policies of China and East Asian economies, why did China’s current account surplus rise so much and attract so much attention? What was the role of China’s policies and saving rate in the evolution of the global crisis?

This chapter argues that China’s current account surplus was caused by the country’s high corporate saving rate, resulting from its dual-track reform strategy, and by the relocation of the labor-intensive tradables sectors of East Asian economies to China in the 1980s, which accelerated after China’s accession to the World Trade Organization in 2001.

China’s dual-track reform strategy led to high corporate savings

China’s large current account surplus reflects a high ratio of savings to investments. Saving and investment rates have both been extremely high in recent years. With a current account surplus equivalent to more than 0.5 percent of global GDP since 2005, China has accumulated more foreign reserves than the combined reserves of all industrial countries. While household savings are high, however, at about 20 percent of GDP they are not much higher than in India and some other Asian countries. China’s corporate saving rate is substantially higher than that of other Asian countries and other emerging market economies, however.