How Growth Deceleration in the People’s Republic of China Affects Other Asian Economies: An Empirical Analysis

Developing Asia has benefited greatly from the rise of the People’s Republic of China (PRC), primarily through the trade channel. The PRC and its neighbors have collectively formed a regional production network, and the PRC is becoming an increasingly important source of final demand. Two empirical methodologies are used to examine the likely economic impact of growth deceleration in the PRC on other Asian economies: (i) a single-equation approach that captures the trade channel and (ii) a global vector autoregressive model that captures the effects beyond just the trade channel. The results of both analyses confirm that deceleration in the PRC will indeed have a non-negligible negative effect on other economies, especially on East and Southeast Asia. An out-of-sample analysis to tease out the effect of slower growth in the PRC from the recent growth performance of selected Southeast Asian economies suggests that the PRC effect is contributing to the growth dynamics of this region but is not always dominant.