Regime Switches in the Sino-American co-dependency: growth and structural change in china

We present a two-country two-stage growth model capturing several salient features of the special US-China relationship and reproducing the process of export-led growth and structural change in China. In Phase 1, China accumulates and sterilizes US assets (and finances US consumption) as it pegs the renminbi to the dollar at an undervalued level, thus stimulating the domestic production of tradables, compressing domestic consumption and facilitating the transition of surplus labor into the modern sectors of the economy. In Phase 2, we analyze possible future scenarios. In Scenario A, the Chinese fiscal policy is effective in partially substituting exports by shifting the domestic demand toward tradables. Scenario B emphasizes the risks for China of abandoning too early the pegging. Scenario C shows that the Chinese continuation of an export-led growth strategy is economically feasible. ⺠We present a two-country two-stage growth model of the US-China imbalances. ⺠We formalize the Bretton Woods II rationalization of the US-China codependency. ⺠We model the export-led growth process in China. ⺠We model reserve accumulation, capital controls and structural change in China. ⺠We analyze 3 alternative future scenarios for the Chinese export-led growth strategy.