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Assessing the vulnerability of emerging Asia to external demand shocks: the role of China

Daniela Marconi () and Laura Painelli ()

No 38, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The paper assesses the vulnerability of China to external shocks via the indirect negative effect of a slow-down in exports on domestic demand for investment. In the last decade China has increased its dependence on external demand, particularly from the advanced countries; at the same time it has become a primary destination market for goods produced in the rest of emerging Asia. Since 2001 investment expenditures have represented a key driver of Chinese GDP growth; as a very large share of activity in the manufacturing sector is export oriented, we expect fixed capital investment in this sector to be highly related to exports. Overcoming serious shortcomings in available data, we estimate an investment equation for the period 1993-2006 and find an elasticity of investment to exports in the manufacturing sector in the range between 0.9 and 1. Taking into account the dominant contribution of capital accumulation to Chinese GDP growth, we conclude that the growth effects of an external demand shock could become significant when taking into account the domestic investment channel.

Keywords: exports; investment; elasticity (search for similar items in EconPapers)
JEL-codes: F14 E22 N6 (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-cna, nep-dev, nep-sea and nep-tra
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