What Happens in China Does Not Stay in China

59 Pages Posted: 29 Nov 2022

See all articles by William Barcelona

William Barcelona

Board of Governors of the Federal Reserve System

Danilo Cascaldi-Garcia

Board of Governors of the Federal Reserve System

Jasper Hoek

Board of Governors of the Federal Reserve System

Eva Van Leemput

Board of Governors of the Federal Reserve System

Date Written: November 1, 2022

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

Suggested Citation

Barcelona, William and Cascaldi-Garcia, Danilo and Hoek, Jasper and Van Leemput, Eva, What Happens in China Does Not Stay in China (November 1, 2022). International Finance Discussion Paper No. 1360, Available at SSRN: https://ssrn.com/abstract=4288147 or http://dx.doi.org/10.17016/IFDP.2022.1360

William Barcelona (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Danilo Cascaldi-Garcia

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jasper Hoek

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Eva Van Leemput

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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