What Happens in China Does Not Stay in China

RePEc Short ID: pca1251
ORCID iD: 0000-0003-4411-9911

Barcelona, William; Cascaldi-Garcia, Danilo; Hoek, Jasper; Van Leemput, Eva

doi:10.17016/IFDP.2022.1360

Working Paper

What Happens in China Does Not Stay in China

Abstract: Spillovers from China to global financial markets have been found to be small owing to China's limited integration in the global financial system. In this paper, however, we provide evidence that China constitutes an important driver of the global financial cycle. We argue that because of China's importance for global consumption, stronger Chinese growth raises global growth prospects, inducing an increase in global risk sentiment and an expansion in global asset prices and global credit. Two contributions are key to this finding: (1) We construct a measure of China's credit impulse to identify Chinese policy-induced demand shocks. Our approach takes advantage of the fact that a primary tool of China's stabilization policy-encompassing monetary, fiscal, and regulatory policies-is controlling the amount of credit in the economy. Without China's credit impulse, it is difficult to discern global financial spillovers; (2) We estimate an alternative measure of Chinese GDP growth that captures its business cycle given data concerns about the smoothness of official GDP data. Without China's alternative GDP measure, it is difficult to attribute any global cycle movements to economic developments in China.

Keywords: China; Growth; Credit Impulse; Global Financial Cycle; Global Business Cycle; Global Risk Sentiment; Commodity Prices;

JEL Classification: C52; E50; F44;

https://doi.org/10.17016/IFDP.2022.1360