China's new normal and the implications to domestic and global business

Abdul‐Rashid Abdul‐Rahaman and Yao Hongxing

International Journal of Finance & Economics, 2020, vol. 25, issue 2, 157-171

Abstract: We use a VEC model to analyse China's “new normal” and how they affect aggregate components of China's balance of payment account, which represents China and the rest of the world. We assessed whether the tightening financial conditions impact China's long‐run growth. We also assessed the reduction in savings and its effect on growth. We further assess the claim of increasing net capital flows through a stable currency. We also compute China's currency gains and losses in CFET countries using the approach in and analysed how reducing national savings will impact on currency gains in the FX market. Analysing the fluctuations in capital flows, and its determinants, are significant for the restructuring since the government has undertaken to reduce his participation in direct financing. The research found that the gradual tightening of monetary policy if core inflation continues to pick up will not affect the long run current account growth, whereas reduced savings will have a short‐run adverse effect on growth. These conclusions support the assertion in. Furthermore, the liberalization of the financial systems reduces growth in the short run, whereas the fluctuations in renminbi have no impact on the capital account. We, therefore, do not find evidence of currency stability, aiding and facilitating net capital flows. Also, the decision to tighten policy rates and the effects on the capital account depends on the margin of the change. Lastly, the liberalization reforms will increase currency gains and also trigger currency appreciations.

Date: 2020
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