The correlation of savings and exchange rate with China-US trade imbalance

Abstract

The economic globalization interconnects the economy of countries and regions all over the word, making them increasingly integrated and inseparable with each other. But the issue of trade imbalance has become a stumbling block to the economic development of the world. China and the United States have always been at variance in this issue. Trade frictions can be reduced if the two countries can clearly recognize the inevitability of trade imbalances, and take countermeasures based on mutual understanding. This paper points out that the shortage of national savings featuring the deepest impact and the longest duration in the United States is the key factor leading to the China-US trade imbalance; the depreciation of the nominal exchange rate of the Chinese RMB against the US dollar is also a factor that causes the China-US trade imbalance, but the impact of exchange rate depreciation on imbalance is very limited in terms of both degree of impact and duration.

Key word: China-US Trade imbalance, Savings, Exchange Rate

JEL-code: F10

1. Introduction

Trade balance means the approximate balance of imports and exports in foreign trades of a country in a given year. However, trade balance is rare to see in the practices of foreign trade policies formulated by governments around the world. Generally speaking, the government of a country should try to maintain a basic balance of imports and exports in foreign trades and realize a few surpluses, in order to facilitate the healthy development of the national economy.

The trade relation between China, the largest developing country in the world, and the United States, the largest developed country in the world, has achieved all-round development since the establishment of diplomatic relation, especially the implementation of the reform and opening policies in China. This has had a deep impact on both sides and even the global economic pattern. However, the China-US trade friction has appeared frequently since the 1990s, and the major cause is the China-US trade imbalance. As of 2018, the total value of China-US bilateral trade in imports and exports was US$633.52 billion, and China’s trade surplus with the US was US$323.32 billion. [1]We can even say that American trade deficit against China has become a tender spot of China-US trade, and will have an adverse effect on the two countries and bilateral trading ties if it continues to expanding. Thus, it is very important for the two countries to face up to the China-US trade imbalance.

From macroscopic aspects, economists generally believe that savings and exchange rates have a very close correlation with trade balance. The underestimated RMB exchange rate allows the possibility of low prices of products made in China, while the flourishing demands in the United States offers China a huge external market. As a result, the China-US imbalance will be investigated from savings and exchange rates in this paper.

2. Exchange rates and China-US trade imbalance

Exchange rates pose an impact on trades mainly through price of commodities, gross income, interest rate, and risk preference.

Exchange rate fluctuation will result in the price change of import and export commodities, thus exerting an influence on international trade. When the home currency depreciates, the national prices of import commodities will rise, and the international prices of export commodities will decline. When trading conditions satisfy the Marshall-Lerner condition, the import value will decrease, while the export value increase; on the contrary, the appreciation of the home currency leads to the increase of import value, and the decrease of the export value.

Exchange rate fluctuation also affects gross income and domestic absorption, thus having an impact on the international balance of payment. In the cases that the home currency depreciates and the domestic resources are not exploited to the full, the domestic and international demand volumes for commodities made in the country with currency depreciation increase, and the autonomous trade balance is improved. The GDP enhances under the action of Keynes Multiplier, resulting in the increase of gross income. When the import payments account for a large proportion in the national income, the depreciation of home currency will lower the real purchasing power, and improve the international trade balance. On the contrary, the appreciation of home currency will deteriorate the international trade balance. The exchange rate fluctuation can change the interest rate, and thus have an impact on international balance of payments through the investment and consumption of private sectors. The depreciation of home currency, increase of foreign exchange reserve and domestic available capital, lowering of interest rate, and expansion of credit scale will be conducive to reducing productive investment cost of enterprises and enhance the resident consuming intension, thereby imposing an effect on the international balance of payments. Exchange rate fluctuation will increase uncertainty of market risk, affect the decision-making of market participants, thus having an impact on the international balance of payments. Risk seekers tend to carry out covered-interest arbitrage the exchange rate fluctuates violently, which will promote the increase of international trade value; the risk neutrals generally do not change decisions on trades; risk averters usually reduce trades that are largely correlated with exchange rate, thus inhibiting import and export trade.

Exchange rate issues reflect trade issues in essence, so it is of great significance to study the impact of exchange rate fluctuation on the foreign trade of a country. Studies of this issue crop up one after another, but no agreement has reached yet due to differences in research methods and research objects. As the times evolve, theories of traditional economics are not able to deal with many issues. Besides, the real environment is more complex than theoretical assumption. Thus, whether the RMB exchange rate is underestimated and affects the domestic economic development of the trading state remains to be further studied.

Liu et al. (2018) make analysis using the time-varying co integration model and obtain that the influence of exchange rate fluctuation on Chinese values of import and export weakens distinctly. [2] Li (2016) creates a VAR model based on the monthly data from 1994 to 2014 to investigate the dynamic relation between RMB exchange rate, China-US trade deficit, and the US unemployment rate. The results show that RMB exchange rate only has a short-term impact on the China-US trades and the specific embodiments include hysteresis and volatility, and that RMB exchange rate is not the primary cause of continuous surplus of China-US trade.[3] Zhang et al. (2017) carry out regression analysis on exchange rate symmetry and asymmetric trade effect through creating the NARDL and ARDL models, obtaining that the J-curve effect does not exist, and that the long-term effect of exchange rate fluctuation on China-US trade is not significant. They also propose that suggestions such as taking prudent trade policies.[4] Xu (2016) find from their research on China-US trade over the 20 years from 1995 to 2015 that the impact of RMB exchange rate on China-US trade is not stable, but varies with time.[5] Xiao and Pan(2016) carry out a research on the trade data of China and its 21 partner countries, finding that the appreciation of exchange rate can promote the export trade of China with developing countries, but has less impact on that with developed countries.[6] Taylor (2013) believes that the status of the US dollar as the global foreign currency reserve currency leads to the huge deficit of its current account.[7] Qiao and Zhou(2019) introduce the policy instrumental variable Tt of the Belt and Road Initiative on the basis of the theoretical model, and find through comparative analysis that China-Us trades are less affected by bilateral exchange rates after considering the policy influence. RMB appreciation cannot reduce the China-US trade deficit both before and after introducing the policy variable.[8] Song (2020) concludes that the short-term RMB appreciation will not reduce the trade deficit through analyzing the quarterly data of Chinese trade deficit from 2005 to 2018 through co integration test and vector error correction model.[9] Chiu and Ren (2019) study the data on trade value and saving rate of China and its 102 trade partners from 1995 to 2014, finding that the Chinese saving rate can improve the bilateral trade balance with its trade partners when the saving rate of China differs slightly with that of its trade partners, but the saving rate may not be enhanced significantly, or may be reduced when the difference is large.[10]Wang and others (Qu (2006) [11], Li (2006) [12] Gao (2009) [13] respectively used econometric analysis to show that the trade imbalance between China and the United States has no direct relationship with the RMB exchange rate, and came to the conclusion that the RMB appreciation can only alleviate the surplus to some extent in the short term, but has a weak effect in the long run.

3. Savings and China-US trade imbalance

After the implementation of the reform and opening-up policy in 1978, China has gotten rapid economic development, which has promoted the sustaining and rapid expansion of the investment scale, but the growth rate of domestic savings is far higher than that of investment, thereby generating a large amount of savings surplus in China. [14]Since the reform and opening-up, it has been over 40 years and China has been making efforts to expand government investment and build infrastructure. China’s high national savings provide fund guarantee to the government. According to the data released by the National Bureau of Statistics of China, the aggregate investment of fixed assets of the whole Chinese society in 2019 was 55.1 trillion Yuan, while the figure in 2000 was 3.3 trillion Yuan, with an increase of 16.69 times over 19 years [15].At present, the rapid development of China’s economy cannot be separated from the financial support brought by the high national saving ratio. Chinese enterprises have gained huge economic benefits through investment, and some companies tend to pay higher wages to the employees. Meanwhile, enterprises further invest their profits in expanded reproduction, and thus boost the growth of China’s national saving ratio. [16]

The viewpoint that the consumption saving structure has an impact on trade balance was initially proposed by an American scholar. According to Bernanke, first of all, the influence of low savings in the United States on trade deficit is not elementary, and the primary cause is the saving over plus of other countries. Old industrialized countries have finished the industrial upgrading and generational change, causing high savings and low investment. Developing countries accumulate substantive foreign exchange reserves, which are also one of the savings [23]. Petroleum exporting countries also invest the obtained petrodollars in the United States. Second, the United States is attracting the excess savings capital all over the world by virtue of ties developed capital market, favorable regulation level, liberal marketing environment, and status of American dollar as an international currency. Third, measures taken by the Federal Government such as eliminating financial deficit or improving national savings are not efficient for alleviating the current account deficit as long as international savings keep flowing into the United States. [17] However, it is apparent that the viewpoints of Bernanke put little emphasis on the responsibilities of the United States, but direct the spearhead of conflicts at external factors. He believes that both old and newly industrialized countries in Europe have a problem of high saving rate for diversified reasons, driving excess capitals to flow to the United States and intensifying the trade deficit in the United States. Cooper (2006) indicates in the study of American savings and investments that the China-US trade deficit manly derives from too low saving rate in the United States. [18] Smallwood (2019) analyzes the data of bilateral trade volumes of top 10 export market in China from 1994 to 2017 and the impact of uncertainty of exchange rate on amount of exports using the DCC-GARCH model. The results show that the uncertainty of exchange rate has no influence on American trades. [19] Lin and Schramm (2008) study the micro, meson and macro savings and investments in China based on the data from 1995 to 2005, finding that influx of foreign capital and excess saving account for the current account deficit of China. [20] Chinn and HI to (2007) argue that it is the low savings of the United States that cause the increasing aggravation of the current account deficit. They carry out an empirical test on the “global excess savings hypothesis”, eliminate the influence of many factors such as institutional factor from the model, but put emphasis on the interim determinants of the current account. The results show that excessive savings do not account for the current account surplus of Asian emerging economies, but the apparently insufficient investment, and while the reason for the formation of American current account deficit is the strikingly apparent shortage of savings, but the insufficient domestic investment. [21, 22]

4. A statistical analysis of the correlation of savings and exchange rate with China-US trade imbalance

4.1 Statistical methods for the savings and exchange rate factors of Sino-US trade imbalance

4.1.1 Data selection

In this paper, the data of China’s surplus volume to the US (denoted as SC unit: 100 million dollars), the effective exchange rate of RMB against US dollar (denoted as R) and the difference in the national saving ratio between China and the US(denoted as QC) in Sino-US trade from 2000 to 2018 were selected. The multiple linear regression models were used to obtain the relationship among SC, R and QC, and further empirically analyze whether the decrease of QC and the appreciation of RMB can reduce SC.

The data of SC and R were from China Statistical Yearbook (2000-2018); [24] the data of the national saving ratios of China and the US were from the Federal Reserve Date Base [25], and the QC was calculated indirectly.

4.1.2 Analysis indexes

In Sino-US trade, China’s surplus volume to the US is denoted as SC, the effective exchange rate of RMB against US dollar is denoted as R, and the difference in the national saving ratio between China and the US is denoted as QC.

4.1.3 Modeling

To eliminate the possible influence of heteroscedasticity, the natural logarithms of the above variables were calculated to respectively get LNSC, LNR and LNQC. Based on this, the influence factor model of Sino-US trade imbalance obtained is as follows:

LNSC = β₀ + β₁LNR + β₂LNQC + ε

Where β₀ is a constant term, β₁ is the influence coefficient of the exchange rate on China’s surplus to the US, β₂ is the influence coefficient of the difference in the national saving ratio between China and the US on China’s surplus to the US, and  ε is the residual term. Next, this paper will use the 2000-2018 sample data of various variables to analyze the influence of exchange rate and the difference in the national saving ratio between China and the US on China’s surplus to the US.

4.2 Descriptive statistics

Descriptive statistical analyses are conducted on China’s surplus to the US, the exchange rate and the difference in the national saving ratio between China and the US from 2000 and 2018, and the trend charts are drawn respectively. The results obtained are as follows (Table 1.).

Figure: The Trend of SC

Figure: The Trend of Exchange Rate

Figure: The Trend of QC

According to the above statistical table and trend charts, the trade surplus of China to the US from 2000 to 2018 was continuously enlarged, and the fluctuation was large, from $29.73 billion in 2000 to $32.33 billion in 2018; the effective exchange rate roughly presented a downtrend, the RMB appreciated to some extent, and the RMB appreciation level reached the peak in 2014. Besides, the difference in the national saving ratio between China and the US also presented an inverted V-shaped feature over time; it showed a continuously increasing trend from 2000 to 2009 and then gradually decreased from 2010 to 2018.

4.3 Stationary test

Since the data used in this paper was time series data, to avoid spurious regression, the stability of each variable needs to be judged at first. By using EVIEWS and the commonly used ADF unit root test, the stability of LNSC, LNR and LNQC was tested. The results were summarized as follows (Table 2.).

The analysis of the above test results shows that, suppose LNSC has a unit root, the P value of the test is 0.8392 and greater than 0.05, so the null hypothesis accepted. This indicates that LNSC has a unit root and is non-stationary; similarly, LNR and LNQC also have a unit root and are non-stationary. Then their first difference sequences △LNSC, △LNR and △LNQC are tested and the results show that the corresponding P values are still greater than 0.05, so the three first difference sequences are non-stationary. The results of their second difference sequences △△LNSC, △△LNR and △△LNQC show that, the corresponding P values are lower than 0.05, so the hypothesis that the second difference sequences have no unit root in the confidence level of 5% can be rejected. This suggests that all the above second difference sequences have no unit root and are stationary.

Because LNSC, LNR, LNQC and their first difference sequences are all non-stationary, while their second difference sequences are stationary, the three variables are all second-order single integrated time series and belong to the case of single integration in the same order. Next, the co-integration test is conducted.

4.4 Co-integration test

The co-integration test on LNSC, LNR and LNQC is carried out by using EG two-step method. The idea is to first carry out regression analysis on the model, and then conduct ADF unit root test on the regression residual. If the residual is stationary, then there is a co-integration relationship between the variables, and the estimated results of the model are reliable.

Firstly, by using the EVIEWS software and the least square method, a regression analysis of the model is conducted, and the estimated results are as follows (Table 3.).

It can be observed from the above table that the R-square estimated by the model is 0.805707, and the goodness of fit is relatively high; the corresponding P-value of F statistic is 0.000002 and less than 0.05, indicating that the linear relationship between LNSC and LNR and LNQC is significant. Therefore, the regression results of the model are ideal.

Then ADF unit root test is conducted on the residual obtained above. The results are as follows (Table 4.).

It can be seen that the P value is 0.0099 and less than 0.05, so the null hypothesis can be rejected at the confidence level of 5%. This indicates that the residual has no unit root and is stationary. Therefore, there is a long-term co-integration relationship between LNSC and LNR and LNQC, and the development trend is stable. The relation equation between the variables is obtained as below:

LNSC=9.868632-3.944094*LNR+1.525821*LNQC

The regression results show that, the P values of the significance test on the estimated coefficients of LNR and LNQC are 0.0003 and 0.0107, respectively, and less than 0.05, so the estimated coefficients passed the significance test. Hence, the exchange rate and the difference in the national saving ratio between China and the US have a significant impact on the trade surplus of China to the US. The exchange rate exerts a negative impact on the trade surplus, and the difference in the national saving ratio between China and the US exerts a positive impact on the trade surplus.

4.5 Analysis of results

According to the analysis of the above results, there is a long-term co-integration relationship between the trade surplus of China to the US and the exchange rate and the difference in the national saving ratio between China and the US, with a stable development trend. Specifically, the effective exchange rate of RMB against US dollar exerts a significantly negative impact on the trade surplus of China to the US. This shows that the trade surplus did not decline with the relative appreciation of RMB, and the scale of Sino-US trade imbalance is quickly expanding. The difference in the national saving ratio between China and the US exerts a significantly positive impact on the trade surplus of China to the US, that is, the greater the difference in the national saving ratio is, and the larger the trade surplus will be.

5. Conclusion

The increase in exports is far greater than the increase in imports, which is the structural feature of the China-US trade imbalance. As a result, we can explain the China-US trade imbalance by the factors for greater exports than imports. For one thing, the exchange rate represents the relative price of commodities in two countries, and if the RMB exchange rate is underestimated, the prices of China’s exported commodities are bound to fall, making them more internationally competitive, and promoting China’s exports to the United States. At the same time, the prices of imported commodities are pushed up, thus inhibiting China’s imports from the United States. Consequently, China’s exports to the United States exceed its imports from the United States. For another, changes in demand will cause an imbalance in trade between two countries. The continuous expansion of domestic demands in the United States will increase imports from China, resulting in a US trade deficit against China. The relationship between demands and savings is dual, and a high propensity for demands means a low propensity for savings. Therefore, our findings show that saving and exchange rate are important macroeconomic factors for China-US trade imbalance. If measures are required from a macro level to eliminate the China-US trade imbalance, adjusting the national saving rate in the United States is the key, and the appreciation of the RMB exchange rate will have a very limited effect.

In conclusion, the difference in saving ratio between China and the US is an important cause for the sustainable increase of China’s trade surplus to the US in the international trade. China’s national saving ratio is excessively high, with a large amount of saving gluts. In addition, the high consumption of the US can increase imports, while the high savings of China can increase exports, thereby resulting in the long-term Sino-US trade imbalance as well as the gradually enlarged trade gap between the two countries.

The RMB exchange rate is one of the influencing factors of Sino-US trade imbalance, but it is not the fundamental one. The restriction on RMB appreciation by political means within a short time only exerted an impact on the import and export trade in the short run, but did not change the base for the Sino-US trade. Based on the economic strength of the two countries and the industrial division in different stages, the present Sino-US trade imbalance in international trade will not change fundamentally because of exchange rate fluctuation.

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Jiandong Shi
PhD student in Economics
PhD student of the Doctoral School of Public Administration Sciences of the National University of Public Service