| Since the incremental reform beginning in late1978, China has made great progressin economic development. China’s GDP, after deducting price growh, had been growingat a rate of9.88%on average during1978and2012. After several years of deficit since1978, China’s foreign trade began to have surplus since1994. Foreign trade surplusexceeded$200billion in2007and reached$295.46billion in2008，and affected by thefinancial crisis, the value dropped to$196.06billion in2009. In2010and2011, itcontinues to drop to$181.51billion and$155.14billion. In2012, however, it increasedto$231.11billion again.The increasing trade surplus had contributed to stimulating economic growth,expanding employment, improving the balance of payments and increased foreignexchange reserves, but it has also brought many negative effects. Imbalance in China’strade has been attracting growing attention around the world. The problem of China’scurrent-account surplus is the focus of international economic policy debate in recentyears.Scholars from home and abroad have been studying and analyzing China’s externalimbalance and its impact, and putting forward some remedies to rebalance China’seconomy. Chinese government has also been making efforts to do the same thing. Theyhave made little success. Then, what on earth has resulted in the external imbalance ofChina and how will it be?The description of the status quo of factor market distortions is divided into fiveaspects: labor, capital, land, energy and other natural resources and environment. Thereare serious factor distortions in these five areas and all these distortions have greatinfluence on China’s economic development mode.The formation mechanism of factor market distortions is analyzed. The Chinesefactor market distortions have profound systemic roots. factor market distortionsoriginated from the various arrangements of planned economy system； After the reformand opening up, in the course of marketing economy, the reform of product market andfactor market is not synchronized. The product market is almost completely marketed, but influence of various institutional factors which lead to price distortions existed andcontinued to play a role in factor price. These system obstacles include: the householdregistration system, land system, taxation system combined with the system of land andthe cadre evaluation mainly consisted of GDP performance. These institutional factorseventually "lock" the market factors of distortions. Therefore, the factors distortionshows some characteristics of path dependence.Based on the China’s external imbalances and factor market distortions analysis, thetheoretical transmission mechanism between the two is analyzed. After all these jobs, thecorresponding empirical analysis is made. This paper argues for the existence of direct orindirect relationship between the factor market distortions and external imbalance. Inorder to explore the conduction mechanism between them, in theory, the micro andmacro theoretical basis is established between the factor distortions and externalimbalances, and in the empirical analysis, a panel data model is used to analyze therelationship between factor distortions and external imbalance. And the internalimbalances are included in the analysis framework.This paper consists of six chapters and is organized as follows:Chapter1is the introduction, including the research background, the theoretical andpractical meaning of the research, the related literature review, research ideas andmethods, and innovation and deficiency of the paper.Chapter2examines the main characters of the external imbalances in the Chineseeconomy, the reason of the imbalance and the risk of the long term of the imbalance.With the rapid development of China’s foreign trade and the utilization of foreign directinvestment, the external imbalance of China’s economy becomes increasingly serioussince2004, namely the "double surplus" external imbalance of the current accountsurplus and capital account surplus. Based on the analysis of "double surplus" of thecurrent account and capital account, risks of persistent external imbalance are analyzed inthis chapter.Chapter3is the root reason of external imbalance China’s economy. Firstly, therelated literature of distortion and factor distortion theory is tailored and the meaning ofdistortion and factor distortion is defined. Secondly, Five aspects of factor marketdistortions, namely labor, capital, land, energy and other natural resources and environment, are analyzed. There are serious distortions in these five areas, which hasgreat influence in China’s economic development pattern. Finally, formation mechanismof factor market distortions is analyzed which shows that there are profound systemicroots in China’s factor market distortions.Chapter4explores the mechanism of the impact of factor market distortions onChina’s external imbalance. The distortions of factor market of labor, capital, land,energy and environment lead to lower share of household income in GNP and result inincome inequality; and due to the inadequate social security net in China, householdshave to save more for precautionary purpose; also underdevelopment of financial sectormakes it impossible for the household to have a choice of inter-temporal consumption.All these things tend to lower the marginal propensity to consume and result ininsufficient domestic consumer demand. Distortions of factor price lowers the cost ofproduction, which is equivalent to the enterprise subsidies, makes the enterpriseinvestment good prospects of gain, improves the investment enthusiasm of enterprises,and expands the production capacity；It is also because of distortions in the factorsmarket, FDI has been continuing to flow into China for investment profit, furtherextending production capacity. More production and less consumption lead to theproblem of excess of production capacity and internal structural imbalance. The lowprice of Chinese factors means low production cost, and the product price is relativelylow after the cost plus profit, which increases the foreign demand. Facing the insufficientdomestic consumption and pile up in excess of production capacity, enterprises have todispose the surplus capacity through exports, which eventually led to the trade surplus tobecome too large. Large trade surplus brings the pressure on the settlement of exchangeand an expectation of renminbi appreciation, which attract hot-money to flow into China.Hot-money together with the inflow FDI leads to the surplus of financial and capitalaccount (KA), and finally results in the twin surplus of balance of payment, i.e. externalimbalance of macro-economy.Chapter5is the empirical analysis of the relationship between the externalimbalances and factor market distortion. In this chapter, firstly, a C-D productionfunction is used to determine the degree of price distortion of labor and capital employedin enterprises of various ownerships during2000and2011. Then a panel data model is applied to analyze the transmission effect among the factor distortion, internal imbalanceand external imbalance. Finally, the studying result show that: factor distortions have asignificant negative marginal effect; while in KA surplus model, KA distortion exercise asignificant negative effect on KA surplus, however, it is not statistically significant forlabor distortion to have a positive effect; relative to external imbalance, internalimbalance has a much stronger effect in factor distortion. It is not statistically significantof KA surplus to have an effect on factor distortion whereas current account (CA) hassuch an effect to some extent. All these indicate that China is already trapped in a viciouscircle of increasingly serious internal imbalance, external imbalance and factor distortion,which needs the urgency of the reform of factor market.Chapter6is the adjustment strategy of China’s external imbalance. Only throughthe transformation of the mode of economic development, coordinated and balancedeconomic development, the transformation of government functions, and changing theview of achievement in local official’s post could a good policy and system environmentbe provided for the factors price to be straightened out and the factor market distortionsto be eliminated. The feasible ways to eliminate the factor market distortions are: firstly,continuing to reform the household registration system, to improve the social securitysystem and to strengthen the education investment; secondly, continuing to accelerate theconfirmation of the right of rural land use and to improve the land transfer system; thirdly,continuing to further promote the reform of the market of energy and natural resourceslike water price; and finally, continuing to accelerate the reform of market-orientedinterest rate and exchange rate. |
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