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For immediate release: January 25, 2011

Dallas Fed: Structural Economic Issues at Heart of U.S.–China Trade Imbalance

DALLAS—Rather than an undervalued yuan, China’s ballooning current account surplus with the U.S. may reflect deeper structural distortions in its economy, according to the latest issue of the Federal Reserve Bank of Dallas’ Economic Letter.

Economic Letter can be found at:

In “With Reforms in China, Time May Correct U.S. Current Account Imbalance,” senior research economist Jian Wang says increases in corporate and government savings have resulted from structural economic distortions China should correct to balance its current account.

The booming global economy around 2005 began boosting China’s corporate profits, according to Wang. Many of these profits flowed into state-owned corporations, which continue to dominate and crowd out private companies in industries with higher margins, such as finance, energy, telecommunications, transportation and real estate.

Earnings in high-margin industries were transformed into savings because the government lacked channels to redistribute them for household consumption, Wang says.

“Financial-sector reform and removal of entry barriers in industries dominated by state enterprises will decrease the corporate savings rate,” Wang writes. “Authorities should also increase competition in these now highly regulated industries, promoting efficiency and economic growth in the long run.”

An appreciating yuan may only minimally reduce the trade imbalance between the U.S. and China, Wang notes.


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Alexander Johnson
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