Chinese Financial Conditions and Their Spillovers to the Global Economy and Markets

35 Pages Posted: 23 Oct 2019

See all articles by Jeremy Lawson

Jeremy Lawson

Aberdeen Standard Investments

Carolina Martinez

Aberdeen Standard Investments

Abigail Watt

Aberdeen Standard Investments

Rong Fu

Aberdeen Standard Investments

Date Written: October 2019

Abstract

Assessing financial conditions in China is challenging given the wide range of conventional and unconventional policy tools the authorities wield to influence economic and market variables. We utilise principal component analysis to construct a new index that captures the most important policy and market dimensions of Chinese financial conditions over time. We then study the relationship between the index and key domestic and international economic variables, as well as asset prices, within a Bayesian VAR framework. We find evidence that exogenous shocks to Chinese financial conditions have strong spillover effects, particularly to global industrial activity, and emerging market bond spreads and equity prices. However, a variant of our model that allows for time-variation in the parameters implies that these spillover effects have been diminishing over time. When compared to the effects of US economic and financial conditions, our results suggest that Chinese economic shocks have weaker spillovers but financial shocks have stronger spillovers, particularly to emerging markets.

Keywords: Bayesian VAR, Chinese Economy, financial conditions, Financial Markets spillovers, Impulse Responses, Macroeconomic spillovers, TVP-Bayesian VAR, Variance Decomposition

JEL Classification: C11, E32, E42, E44, E47, E51, E58

Suggested Citation

Lawson, Jeremy and Martinez, Carolina and Watt, Abigail and Fu, Rong, Chinese Financial Conditions and Their Spillovers to the Global Economy and Markets (October 2019). CEPR Discussion Paper No. DP14065. Available at SSRN: https://ssrn.com/abstract=3474437

Jeremy Lawson

Aberdeen Standard Investments ( email )

Carolina Martinez

Aberdeen Standard Investments ( email )

6 St Andrew Square
Edinburgh, EH2 2BD
United Kingdom

Abigail Watt

Aberdeen Standard Investments ( email )

Rong Fu (Contact Author)

Aberdeen Standard Investments ( email )

6 St Andrew Square
Edinburgh, EH2 2BD
United Kingdom

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