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Towards Recoupling? Assessing the Global Impact of a Chinese Hard Landing through Trade and Commodity Price Channels

Listed author(s):
  • Ludovic Gauvin
  • Cyril Rebillard

China’s rapid growth over the past decade has been one of the main drivers of the rise in mineral commodity demand and prices. At a time when concerns about the sustainability of China’s growth model are rising, this paper assesses to what extent a hard landing in China would impact other countries, with a focus on trade and commodity price channels. After reviewing the main arguments pointing to a hard landing scenario – historical rebalancing precedents, overinvestment, unsustainable debt trends, and a growing real estate bubble – we focus on a sample of 36 countries, and use a global VAR methodology adapted to conditional forecasting to simulate the impact of a Chinese hard landing. We model metal and oil markets separately to account for their different end-use patterns and consumption intensity in China, and we identify three specific transmission channels to net commodity exporters: through real exports, through income effects (related to commodity prices), and through investment (a fall in commodity prices reducing incentives to invest in the mining and energy sectors); we also look at the role played by the exchange rate as a shock absorber. According to our estimates, emerging economies (ex. China) would be hardest hit – with a 7.5 percent cumulated growth loss after five years –, in particular in South-East Asia but also in commodity-exporting regions such as Latin America; advanced economies would be less affected. The "growth gap" between emerging and advanced economies would be considerably reduced, leading to partial recoupling.

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File URL: http://economix.fr/pdf/dt/2015/WP_EcoX_2015-21.pdf
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Paper provided by University of Paris Nanterre, EconomiX in its series EconomiX Working Papers with number 2015-21.

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Length: 59 pages
Date of creation: 2015
Handle: RePEc:drm:wpaper:2015-21
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