Trade integration, restructuring and global imbalances : a tale of two countries

China is widely seen as one of the sources of global macroeconomic imbalances. Its persistent current account surplus and capital exports to the United States are even cited as one of the causes of the global financial crisis. The most common explanation traces China's current acca ount surplus to a mismatch between saving and investment due to inefficiently low domestic demand. We challenge this explanation. Our argument rests on an analogy that we construct between two countries generally thought to be very different: Russia and China. Russia, a raw materials exporting country, has been running current account surpluses similar to China's in relation to GDP. As for most raw materials exporting countries this is considered normal, reflecting efficient reinvestment of wealth from natural resources in financial assets. We show that a similar efficiency argument can be constructed for China, although the nature of wealth that is reinvested in financial assets is different in the two countries. Our analysis implies that China's current account surpluses can be expected to disappear over the long horizon - although the time when this will happen may still be very far away. Moreover, an appreciation of the Chinese currency may not have the desired effect of mitigating the country's current account surplus as a weakening in competitiveness is counterbalanced by a strengthening of investment motives.