Fiscal expenditure bias, financial constraints and China's trade imbalance
【Abstract】Since 1994, one of the most significant phenomena accompanied with China's persistent trade imbalance is the fiscal expenditure bias. A large number of expenditure on productive public goods provides huge subsidies to enterprises, increasing the proportion of enterprises in the distribution of social total output, which leads enterprises to strengthen the saving and investment tendency. The relative decline in the income of residents and the insufficient government expenditure on non–productive public goods make the consumption capacity of residents limited and it is difficult to reduce the saving ratio. The whole society's huge savings, with the constraints of the financial market, find it difficult to be completely translated into domestic investment and consumption. Therefore, a large number of domestic excess savings can only be balanced in the form of net exports of goods and services, which leads to the foreign trade imbalance of China accordingly. The further econometric analysis proves the above theoretical hypothesis, that is, fiscal expenditure bias and financial constraints are the important factors causing China's foreign trade imbalance. Therefore, in the process of implementing a more balanced development strategy of import and export trade, China should pay more attention to the important roles of the financial expenditure structure and financial market deepening.
【Keywords】 fiscal expenditure bias; financial constraints; trade imbalance;
(Translated by ZHANG Liping)
. 1 According to the Bulletin of National Bureau of Statistics, the import and export trade surplus was CNY 1.61 trillion in 2013 and CNY 2.35 trillion in 2014. [^Back]
. 2 Since the reform of foreign exchange system in 1994, China has implemented the mandatory bank settlement system. But the revision of the Regulations on Foreign Exchange in 2008 stipulates that the company or individual can retain foreign exchange in the light of stipulations, but the retained foreign exchange is still the minority, and the vast majority is still sold to the central bank at the end. [^Back]
. 3 According to equation (I − S) + (G − T) + (X − M) = 0, for the difference between a country's investment rate and savings rate is relatively stable, the difference between the import and export trade is mainly affected by the fiscal balance of payments. [^Back]
. 4 The author's calculation shows that: from 1978 to 2013, the correlation coefficient between the proportion of China's current account balance in GDP and the proportion of fiscal revenue and expenditure in GDP is 0.1982. [^Back]
. 5 Since the reform and opening up, China’s expenditure share of science, education, culture and public health in GDP has been significantly lower than the average of Organisation for Economic Co-operation and Development (OECD) countries, even lower than that of South Africa, Brazil and other major emerging economies; at the same time, China's defense spending is also lower than the average level of the world for a long time. [^Back]
. 6 Based on studies of Wang Yuhua (2007), Arrow & Kurz (1970) and Turnovsky & Fisher (1995), the spending on science and technology, education, culture, health, social security and defense is set as non-productive expenditure, and other expenditure uniformly set as productive expenditure [^Back]
. 7 During this period, the main driving force to promote China’s financial deepening is the transition process for China from planned economy to market economy and from domestic to global, and the heavy industrialization, the reform of state-owned enterprises and land and a series of other resource elements newly entering to the market are the main phenomena, and these need the support of financial deepening and to absorb a lot of money as basis. Therefore, the proportion of the private bank credit in GDP has its limitations to comprehensively reflect China's financial deepening process. [^Back]
. 8 The data caliber and calculation methods are all consistent with Penn Table. [^Back]
. 9 Cai Fang (2010)’s study showed that in 2010 or so, China’s demographic dividend began to gradually disappear with the arrival of Lewis Turning Point. [^Back]
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