This paper argues that declining transaction costs in exporting on the one hand and the structural and institutional barriers to importing and consumption on the other hand are the main causes for China's rising current account surplus. Reforms in China's planning, financial, and regulatory systems are more important than adjustment in nominal exchange rate for balancing China's trade and for China's surplus capital to hire more of its surplus labor. Although structural inflation and currency appreciation are necessary for China's price level to catch up step-by-step with those in the advanced economies, the pace of inflation and appreciation need to be compatible with China's underlying productivity growth. An “inflation first and appreciation second” approach would help China avoid the risks of both deflation and runaway inflation. The United States and China can have win–win results if both focus on the real constraints behind their external imbalances.

Given the domination of bank financing, nonperforming debts (NPDs) in large Chinese enterprises are a proxy for nonperforming loans (NPLs) in China's major banks. Using a firm-level survey of more than 20,000 large and medium-sized industrial enterprises conducted by the National Bureau of Statistics of China, this paper estimates both the level and ratio of NPDs across ownership type, industry, and region for the period 1995–2002. The results show that NPD ratios have been falling since 2000 as a result of the rapid expansion of better-performing non-state enterprises (NSEs), the improved performance of state-owned enterprises (SOEs), and the exit of poor-performing enterprises (which has been facilitated by asset management companies and other merger and acquisition activities). SOEs, however, are still much more likely than NSEs to generate NPDs. This paper provides useful tools and sector information for assessing enterprise debt risks and draws lessons for banking reform in China.