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What Happens in China Does Not Stay in China

William Barcelona, Danilo Cascaldi-Garcia (), Jasper Hoek and Eva Van Leemput ()

No 1360, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Spillovers from China to global financial markets have been found to be small owing to China's limited integration in the global financial system. In this paper, however, we provide evidence that China constitutes an important driver of the global financial cycle. We argue that because of China's importance for global consumption, stronger Chinese growth raises global growth prospects, inducing an increase in global risk sentiment and an expansion in global asset prices and global credit. Two contributions are key to this finding: (1) We construct a measure of China's credit impulse to identify Chinese policy-induced demand shocks. Our approach takes advantage of the fact that a primary tool of China's stabilization policy-encompassing monetary, fiscal, and regulatory policies-is controlling the amount of credit in the economy. Without China's credit impulse, it is difficult to discern global financial spillovers; (2) We estimate an alternative measure of Chinese GDP growth that captures its business cycle given data concerns about the smoothness of official GDP data. Without China's alternative GDP measure, it is difficult to attribute any global cycle movements to economic developments in China.

Keywords: China; Growth; Credit Impulse; Global Financial Cycle; Global Business Cycle; Global Risk Sentiment; Commodity Prices (search for similar items in EconPapers)
JEL-codes: C52 E50 F44 (search for similar items in EconPapers)
Date: 2022-11-25
New Economics Papers: this item is included in nep-ban, nep-cna, nep-fdg, nep-ifn and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1360

DOI: 10.17016/IFDP.2022.1360

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