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American And European Financial Shocks: Implications For Chinese Economic Performance

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  • Rod Tyers

    ()

  • Iain Bain

Abstract

With exports almost half of its GDP and most of these directed to Europe and North America, negative financial shocks in those regions might be expected to retard China’s growth. Yet mitigating factors include the temporary flight of North American and European savings into Chinese investment and some associated real exchange rate realignments. These issues are explored using a dynamic model of the global economy. A rise in American and European financial intermediation costs is shown to retard neither China’s GDP nor its import growth in the short run. Should the Chinese government act to prevent the effects of the investment surge, through tighter inward capital controls or increased reserve accumulation, the associated losses would be compensated by a trade advantage since its real exchange rate would appreciate less against North America than those of other trading partners. The results therefore suggest that, so long as the financial shocks are restricted to North America and Western Europe, China’s growth and the imports on which its trading partners rely are unlikely to be significantly hindered.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2008-08.

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Length: 28 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:een:camaaa:2008-08

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References

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  1. Rod Tyers & Iain Bain & Yongxiang Bu, 2008. "China'S Equilibrium Real Exchange Rate: A Counterfactual Analysis," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 13(1), pages 17-39, 02.
  2. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? If Not, How Costly Is Adjustment Likely to Be?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 211-288.
  3. Rod Tyers & Jane Golley, 2006. "China's Growth to 2030: Demographic Change and the Labour Supply Constraint," PGDA Working Papers, Program on the Global Demography of Aging 1106, Program on the Global Demography of Aging.
  4. Paul Krugman, 2007. "Will there be a dollar crisis?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 22, pages 435-467, 07.
  5. Liu, Jing & Nico van Leeuwen & Tri Thanh Vo & Rod Tyers & Thomas W. Hertel, 1998. "Disaggregating Labor Payments by Skill Level in GTAP," GTAP Technical Papers 314, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  6. Rod Tyers & Jane Golley & Bu Yongxiang & Ian Bain, 2006. "China's Economic Growth and its Real Exchange Rate," ANU Working Papers in Economics and Econometrics, Australian National University, College of Business and Economics, School of Economics 2006-476, Australian National University, College of Business and Economics, School of Economics.
  7. Eichengreen, Barry, 2006. "Global imbalances: The new economy, the dark matter, the savvy investor, and the standard analysis," Journal of Policy Modeling, Elsevier, Elsevier, vol. 28(6), pages 645-652, September.
  8. Rod Tyers & Iain Bain, 2007. "Appreciating the Renminbi," ANU Working Papers in Economics and Econometrics, Australian National University, College of Business and Economics, School of Economics 2007-483, Australian National University, College of Business and Economics, School of Economics.
  9. Tung, Chen-Yuan & Baker, Sam, 2004. "RMB revaluation will serve China's self-interest," China Economic Review, Elsevier, Elsevier, vol. 15(3), pages 331-335.
  10. Ronald McKinnon, 2006. "China'S Exchange Rate Appreciation In The Light Of The Earlier Japanese Experience," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 11(3), pages 287-298, October.
  11. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
  12. Rod Tyers & Jane Golley, 2007. "China’s Real Exchange Rate," ANU Working Papers in Economics and Econometrics, Australian National University, College of Business and Economics, School of Economics 2007-479, Australian National University, College of Business and Economics, School of Economics.
  13. McKinnon, Ronald, 2006. "China's Exchange Rate Appreciation in the Light of the Earlier Japanese Experience," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 06-35, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  14. Kuijs, Louis, 2006. "How will China's saving-investment balance evolve ?," Policy Research Working Paper Series, The World Bank 3958, The World Bank.
  15. Ianchovichina, Elena & Robert McDougall, 2000. "Theoretical Structure of Dynamic GTAP," GTAP Technical Papers 480, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
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Cited by:
  1. Jane Golley & Rod Tyers, 2011. "Contrasting Giants: Demographic Change And Economic Performance In China And India," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2011-10, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Rod Tyers, 2012. "The Rise and Robustness of Economic Freedom in China," Economics Discussion / Working Papers, The University of Western Australia, Department of Economics 12-02, The University of Western Australia, Department of Economics.
  3. Rod Tyers & Feng Lu, 2009. "Competition Policy, Corporate Saving and China's Current Account Surplus," ANU Working Papers in Economics and Econometrics, Australian National University, College of Business and Economics, School of Economics 2009-496, Australian National University, College of Business and Economics, School of Economics.
  4. Rod Tyers, 2012. "Japanese Economic Stagnation: Causes and Global Implications," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 88(283), pages 517-536, December.
  5. Jane Golley & Rod Tyers, 2012. "Demographic Dividends, Dependencies, and Economic Growth in China and India," Asian Economic Papers, MIT Press, MIT Press, vol. 11(3), pages 1-26, October.

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