Global Imbalance Adjustment: Stylized Facts, Driving Factors and China's Prospects

• DOI: http://doi.org/10.1111/cwe.12302
• Published date: 01 November 2019
• Author: Yao Liu,Ming Zhang
• Date: 01 November 2019

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 79–103, Vol. 27, No. 6, 2019

79

*Ming Zhang, Senior Fellow, Institute of World Economics and Politics, Chinese Academy of Social Sciences,

China. Email: zhangming@cass.org.cn; Yao Liu (corresponding author), PhD Candidate, Graduate School of

Chinese Academy of Social Sciences, China. Email: liuyao2197@sina.com.

Global Imbalance Adjustment: Stylized Facts, Driving

Factors and China’s Prospects

Ming Zhang, Yao Liu*

Abstract

This paper summarizes global imbalance adjustment after the GFC and analyzes

the evolution of balance of payments using a four-quadrant diagram. We construct

the framework of a stock adjustment mechanism to analyze the main driving factors

for the imbalance in surplus/deficit countries and debtors/creditors in an attempt to

determine the sustainability of imbalance adjustment. We nd that imbalances have been

reduced to some extent, but most countries have not achieved rebalance after the global

nancial crisis. Therefore, we propose an ideal path for global imbalance adjustment

and summarize the policy practices of representative countries that have followed this

route. Based on our analysis, we suggest that China should learn from the Australian

experience and adopt a macro-prudential assessment policy, actively adjust the domestic

economic structure and optimize the structure of balance of payments.

Key words: current account, ow adjustment, global imbalance, net foreign assets, stock

adjustment

JEL codes: E61, F32, F41, O11

I. Introduction

Since the 2008 global financial crisis (GFC), the global current account imbalance

has been signicantly alleviated and debate over the external balance has turned from

sustainability to rebalance. As it has been over a decade since the GFC, concluding

whether global imbalance has been tackled depends on which standard we choose.

Theoretically, the change of ow in the balance of payments (BOP) and change of stock

in international investment position (IIP) should move in the same direction, although

changes of stock are much slower than changes of flow. However, in reality, there is

often signicant deviation between BOP and IIP adjustment. Moreover, there is notable

heterogeneity in countries’ imbalance adjustments after the GFC.

Ming Zhang, Yao Liu / 79–103, Vol. 27, No. 6, 2019

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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Scholars have attempted to explain this phenomenon from various perspectives.

For example, the reconstruction of the post-crisis trading system has seen global

import and export mainly driven by trades of intermediate and semi-finished

goods rather than finished goods (Kregel, 2019). Another example is that financial

globalization has diversified the denominating currencies for foreign assets and

liabilities (Caballero et al., 2008). In addition, the increase of both the scale and

volatility of cross-border capital ow combined with uctuations in exchange rates

and asset prices make the valuation effect an important channel of stock adjustment

(Yang et al., 2019). Finally, although controversy still exists over whether the global

imbalance has actually eased since the GFC, the International Monetary Fund (IMF)

2014 Pilot External Balance Report suggests that close attention should be paid to

both net debtors’ and net creditors’ growing stock imbalances (IMF, 2014).

This paper attempts to summarize the stylized facts of global imbalance adjustments

after the GFC from both flow and stock perspectives, and to determine the driving

factors behind these adjustments. First, we analyze the global imbalance adjustment

from both flow and stock perspectives. Second, we decompose the stock adjustment

channels to ascertain the main contributing factors of imbalances before and after the

GFC and explore the common rules behind the evolution of the global imbalance. Third,

we adopt a quadrant analysis method to depict the path and trends of various kinds of

national adjustment and discuss the driving forces behind such adjustment. Fourth, we

propose the ideal path for global imbalance adjustment. Finally, we offer suggestions on

how to improve China’s BOP structure.

The rest of the paper is organized as follows: Section II comments on the related

literature. Section III summarizes the stylized facts of global imbalance adjustment.

Section IV explores the driving factors for adjustment. Section V proposes the ideal

path of global imbalance adjustment and explores the best national practices. Section VI

concludes and provides policy suggestions for China.

II. Literature Review

The rapid development of financial globalization and the significant expansion

of both intermediate goods and service trade are an important background for

global imbalance adjustment after the GFC. Because of the differences in negative

effects of the GFC, international capital presents both a regular flow and “reverse

flow mystery” (Prasad et al., 2006) between developed and emerging economies,

and an “allocation puzzle” (Gourinchas and Jeanne, 2013) between emerging