Assessing the Vulnerability of Emerging Asia to External Demand Shocks: The Role of China

20 Pages Posted: 4 May 2009

Date Written: February 16, 2009

Abstract

The paper assesses the vulnerability of China to external shocks via the indirect negative effect of a slow-down in exports on domestic demand for investment. In the last decade China has increased its dependence on external demand, particularly from the advanced countries; at the same time it has become a primary destination market for goods produced in the rest of emerging Asia. Since 2001 investment expenditures have represented a key driver of Chinese GDP growth; as a very large share of activity in the manufacturing sector is export oriented, we expect fixed capital investment in this sector to be highly related to exports. Overcoming serious shortcomings in available data, we estimate an investment equation for the period 1993-2006 and find an elasticity of investment to exports in the manufacturing sector in the range between 0.9 and 1. Taking into account the dominant contribution of capital accumulation to Chinese GDP growth, we conclude that the growth effects of an external demand shock could become significant when taking into account the domestic investment channel.

Keywords: exports, investment, elasticity

JEL Classification: F14, E22, N6

Suggested Citation

Marconi, Daniela and Painelli, Laura, Assessing the Vulnerability of Emerging Asia to External Demand Shocks: The Role of China (February 16, 2009). Bank of Italy Occasional Paper No. 38, Available at SSRN: https://ssrn.com/abstract=1396245 or http://dx.doi.org/10.2139/ssrn.1396245

Daniela Marconi (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Laura Painelli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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