What drives China's current account?

The paper offers an empirical taxonomy of the factors driving China's current account. A simple present-value model with non-tradeable goods explains more than 70 percent of current account variability over the period 1982-2007, including the persistent surpluses since 2001. It also correctly predicts the decline of China's current account since 2008. Expected increases in the prices of non-tradeables (e.g. housing and medical care) and expected declines in net output (GDP less investment and government spending) are the main channels of external adjustment. Much of China's current account surplus seems driven by shocks that have global effects by persistently depressing the world real interest rate. This is consistent with recent theoretical models that suggest that factors related to China's domestic financial development are key in understanding global imbalances.