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The Saving Story Behind China's Trade Imbalance

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Executive Summary

China's mounting trade surplus is an indirect outcome of its extraordinarily rapid economic growth. High growth pulls up the saving rate. And saving beyond a level that can be absorbed by domestic investment is emitted as a capital outflow. The counterpart of a net capital outflow is necessarily a trade surplus, for saving shunted into foreign asset accumulation must derive from export revenue not spent on imports. To elucidate the relationship between saving and growth in China, a recursive vector autoregressive model is estimated for the period 1978 to 2006.

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