Neither a Borrower Nor a Lender : Does China's Zero Net Foreign Asset Position Make Economic Sense?

China in the past few years has emerged as a net foreign creditor on the international scene with net foreign assets slightly greater than zero percent of wealth. This is surprising given that China is a relatively poor country with a capital-labor ratio about one-fifth the world average and one-ten...

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Main Authors:	Dollar, David, Kraay, Aart
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ACCOUNTS ASSETS AVERAGE PRODUCTIVITY BENCHMARK BONDS CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLOWS CAPITAL GOODS CAPITAL INFLOWS CAPITAL OUTFLOWS CAPITAL STOCK CAPITAL STOCK GROWTH CAPITAL-LABOR CAPITAL-LABOR RATIO CAPITAL-LABOR RATIOS DEBT DIMINISHING RETURNS DIRECT INVESTMENT DISTRIBUTION OF WEALTH DOMESTIC CAPITAL DOMESTIC INVESTORS EXCHANGE RATE EXPECTED RETURN EXPROPRIATION EXTERNALITY FINANCIAL SECTOR FOREIGN DIRECT INVESTMENT FOREIGN INVESTMENT GDP GDP PER CAPITA GLOBAL ECONOMY GROWTH RATE HEALTH INSURANCE INDUSTRIAL CAPITAL INFLATION RATE INTEREST RATE INTERNATIONAL CAPITAL INTERNATIONAL TRADE INVESTMENT FLOWS INVESTMENT POSITIONS INVESTMENT RATES MARGINAL PRODUCT MARGINAL PRODUCTS MARGINAL UTILITY NEOCLASSICAL THEORY NET FOREIGN ASSETS NET INFLOWS PER CAPITA INCOMES PORTFOLIO PORTFOLIO FLOWS PORTFOLIOS PRODUCTION FUNCTION PRODUCTIVITY PRODUCTIVITY GROWTH PROPERTY RIGHTS PUBLIC DEBT REAL GDP REGRESSION ANALYSIS RETURN TO CAPITAL RISK PREMIUM SAVINGS TFP TOTAL FACTOR PRODUCTIVITY TRADE BALANCE TRADE DEFICIT UNIT OF CAPITAL WEALTH WTO
Online Access:	http://documents.worldbank.org/curated/en/2005/12/6479844/neither-borrower-nor-lender-chinas-zero-net-foreign-asset-position-make-economic-sense http://hdl.handle.net/10986/8560

id	okr-10986-8560
recordtype	oai_dc
spelling	okr-10986-85602021-04-23T14:02:43Z Neither a Borrower Nor a Lender : Does China's Zero Net Foreign Asset Position Make Economic Sense? Dollar, David Kraay, Aart ACCOUNTS ASSETS AVERAGE PRODUCTIVITY BENCHMARK BONDS CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLOWS CAPITAL GOODS CAPITAL INFLOWS CAPITAL OUTFLOWS CAPITAL STOCK CAPITAL STOCK GROWTH CAPITAL-LABOR CAPITAL-LABOR RATIO CAPITAL-LABOR RATIOS DEBT DIMINISHING RETURNS DIRECT INVESTMENT DISTRIBUTION OF WEALTH DOMESTIC CAPITAL DOMESTIC INVESTORS EXCHANGE RATE EXPECTED RETURN EXPROPRIATION EXTERNALITY FINANCIAL SECTOR FOREIGN DIRECT INVESTMENT FOREIGN INVESTMENT GDP GDP PER CAPITA GLOBAL ECONOMY GROWTH RATE HEALTH INSURANCE INDUSTRIAL CAPITAL INFLATION RATE INTEREST RATE INTERNATIONAL CAPITAL INTERNATIONAL TRADE INVESTMENT FLOWS INVESTMENT POSITIONS INVESTMENT RATES MARGINAL PRODUCT MARGINAL PRODUCTS MARGINAL UTILITY NEOCLASSICAL THEORY NET FOREIGN ASSETS NET INFLOWS PER CAPITA INCOMES PORTFOLIO PORTFOLIO FLOWS PORTFOLIOS PRODUCTION FUNCTION PRODUCTIVITY PRODUCTIVITY GROWTH PROPERTY RIGHTS PUBLIC DEBT REAL GDP REGRESSION ANALYSIS RETURN TO CAPITAL RISK PREMIUM SAVINGS TFP TOTAL FACTOR PRODUCTIVITY TRADE BALANCE TRADE DEFICIT UNIT OF CAPITAL WEALTH WTO China in the past few years has emerged as a net foreign creditor on the international scene with net foreign assets slightly greater than zero percent of wealth. This is surprising given that China is a relatively poor country with a capital-labor ratio about one-fifth the world average and one-tenth the U.S. level. The main questions that the authors address are whether it makes economic sense for China to be a net creditor and how they see China's net foreign asset position evolving over the next 20 years. They calibrate a theoretical model of international capital flows featuring diminishing returns, production risk, and sovereign risk. The calibrations for China yield a predicted net foreign asset position of -17 percent of China's wealth. The authors also estimate nonstructural cross-country regressions of determinants of net foreign assets in which China is always a significant outlier with 5 to 7 percentage points more of net foreign assets relative to wealth than is predicted by its characteristics. China's extensive capital controls can explain why its current net foreign asset position is far away from what is predicted by open-economy models and cross-country empirics. It seems reasonable to assume that China's international financial integration will increase over time. The authors calibrate and predict different scenarios out to 2025. These scenarios are necessarily speculative, but it is interesting that they typically imply negative net foreign asset positions between 3 and 9 percent of wealth. What may be counter-intuitive for many policymakers is that successful institutional reform and productivity growth are likely to lead to more negative net foreign asset positions than occurs with stagnation. Starting from China's zero net foreign assets position, it would take current account deficits in the range of 2-5 percent of GDP to reach any of these net foreign assets positions. These are not unreasonable deficits, but they require a large adjustment from the present 6 percent of GDP current account surplus. 2012-06-20T19:10:03Z 2012-06-20T19:10:03Z 2005-12 http://documents.worldbank.org/curated/en/2005/12/6479844/neither-borrower-nor-lender-chinas-zero-net-foreign-asset-position-make-economic-sense http://hdl.handle.net/10986/8560 English Policy Research Working Paper; No. 3801 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research East Asia and Pacific China
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	ACCOUNTS ASSETS AVERAGE PRODUCTIVITY BENCHMARK BONDS CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLOWS CAPITAL GOODS CAPITAL INFLOWS CAPITAL OUTFLOWS CAPITAL STOCK CAPITAL STOCK GROWTH CAPITAL-LABOR CAPITAL-LABOR RATIO CAPITAL-LABOR RATIOS DEBT DIMINISHING RETURNS DIRECT INVESTMENT DISTRIBUTION OF WEALTH DOMESTIC CAPITAL DOMESTIC INVESTORS EXCHANGE RATE EXPECTED RETURN EXPROPRIATION EXTERNALITY FINANCIAL SECTOR FOREIGN DIRECT INVESTMENT FOREIGN INVESTMENT GDP GDP PER CAPITA GLOBAL ECONOMY GROWTH RATE HEALTH INSURANCE INDUSTRIAL CAPITAL INFLATION RATE INTEREST RATE INTERNATIONAL CAPITAL INTERNATIONAL TRADE INVESTMENT FLOWS INVESTMENT POSITIONS INVESTMENT RATES MARGINAL PRODUCT MARGINAL PRODUCTS MARGINAL UTILITY NEOCLASSICAL THEORY NET FOREIGN ASSETS NET INFLOWS PER CAPITA INCOMES PORTFOLIO PORTFOLIO FLOWS PORTFOLIOS PRODUCTION FUNCTION PRODUCTIVITY PRODUCTIVITY GROWTH PROPERTY RIGHTS PUBLIC DEBT REAL GDP REGRESSION ANALYSIS RETURN TO CAPITAL RISK PREMIUM SAVINGS TFP TOTAL FACTOR PRODUCTIVITY TRADE BALANCE TRADE DEFICIT UNIT OF CAPITAL WEALTH WTO
spellingShingle	ACCOUNTS ASSETS AVERAGE PRODUCTIVITY BENCHMARK BONDS CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLOWS CAPITAL GOODS CAPITAL INFLOWS CAPITAL OUTFLOWS CAPITAL STOCK CAPITAL STOCK GROWTH CAPITAL-LABOR CAPITAL-LABOR RATIO CAPITAL-LABOR RATIOS DEBT DIMINISHING RETURNS DIRECT INVESTMENT DISTRIBUTION OF WEALTH DOMESTIC CAPITAL DOMESTIC INVESTORS EXCHANGE RATE EXPECTED RETURN EXPROPRIATION EXTERNALITY FINANCIAL SECTOR FOREIGN DIRECT INVESTMENT FOREIGN INVESTMENT GDP GDP PER CAPITA GLOBAL ECONOMY GROWTH RATE HEALTH INSURANCE INDUSTRIAL CAPITAL INFLATION RATE INTEREST RATE INTERNATIONAL CAPITAL INTERNATIONAL TRADE INVESTMENT FLOWS INVESTMENT POSITIONS INVESTMENT RATES MARGINAL PRODUCT MARGINAL PRODUCTS MARGINAL UTILITY NEOCLASSICAL THEORY NET FOREIGN ASSETS NET INFLOWS PER CAPITA INCOMES PORTFOLIO PORTFOLIO FLOWS PORTFOLIOS PRODUCTION FUNCTION PRODUCTIVITY PRODUCTIVITY GROWTH PROPERTY RIGHTS PUBLIC DEBT REAL GDP REGRESSION ANALYSIS RETURN TO CAPITAL RISK PREMIUM SAVINGS TFP TOTAL FACTOR PRODUCTIVITY TRADE BALANCE TRADE DEFICIT UNIT OF CAPITAL WEALTH WTO Dollar, David Kraay, Aart Neither a Borrower Nor a Lender : Does China's Zero Net Foreign Asset Position Make Economic Sense?
geographic_facet	East Asia and Pacific China
relation	Policy Research Working Paper; No. 3801
description	China in the past few years has emerged as a net foreign creditor on the international scene with net foreign assets slightly greater than zero percent of wealth. This is surprising given that China is a relatively poor country with a capital-labor ratio about one-fifth the world average and one-tenth the U.S. level. The main questions that the authors address are whether it makes economic sense for China to be a net creditor and how they see China's net foreign asset position evolving over the next 20 years. They calibrate a theoretical model of international capital flows featuring diminishing returns, production risk, and sovereign risk. The calibrations for China yield a predicted net foreign asset position of -17 percent of China's wealth. The authors also estimate nonstructural cross-country regressions of determinants of net foreign assets in which China is always a significant outlier with 5 to 7 percentage points more of net foreign assets relative to wealth than is predicted by its characteristics. China's extensive capital controls can explain why its current net foreign asset position is far away from what is predicted by open-economy models and cross-country empirics. It seems reasonable to assume that China's international financial integration will increase over time. The authors calibrate and predict different scenarios out to 2025. These scenarios are necessarily speculative, but it is interesting that they typically imply negative net foreign asset positions between 3 and 9 percent of wealth. What may be counter-intuitive for many policymakers is that successful institutional reform and productivity growth are likely to lead to more negative net foreign asset positions than occurs with stagnation. Starting from China's zero net foreign assets position, it would take current account deficits in the range of 2-5 percent of GDP to reach any of these net foreign assets positions. These are not unreasonable deficits, but they require a large adjustment from the present 6 percent of GDP current account surplus.
format	Publications & Research :: Policy Research Working Paper
author	Dollar, David Kraay, Aart
author_facet	Dollar, David Kraay, Aart
author_sort	Dollar, David
title	Neither a Borrower Nor a Lender : Does China's Zero Net Foreign Asset Position Make Economic Sense?
title_short	Neither a Borrower Nor a Lender : Does China's Zero Net Foreign Asset Position Make Economic Sense?
title_full	Neither a Borrower Nor a Lender : Does China's Zero Net Foreign Asset Position Make Economic Sense?
title_fullStr	Neither a Borrower Nor a Lender : Does China's Zero Net Foreign Asset Position Make Economic Sense?
title_full_unstemmed	Neither a Borrower Nor a Lender : Does China's Zero Net Foreign Asset Position Make Economic Sense?
title_sort	neither a borrower nor a lender : does china's zero net foreign asset position make economic sense?
publisher	World Bank, Washington, DC
publishDate	2012
url	http://documents.worldbank.org/curated/en/2005/12/6479844/neither-borrower-nor-lender-chinas-zero-net-foreign-asset-position-make-economic-sense http://hdl.handle.net/10986/8560
_version_	1764408121076219904

Neither a Borrower Nor a Lender : Does China's Zero Net Foreign Asset Position Make Economic Sense?

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