economy in the sample. Moreover, countries that are more exposed to China’s investment are affected more adversely by a 1 percentage point shock to China’s investment growth, despite a positive shock to Chineseconsumption growth. The average Asian economy will experience a larger decline in its growth given the heavy reliance of its value-added exports on China’s fixed investment ( Figure 20 , left panel), compared to the average non-Asian economy. Furthermore, the adverse growth impact due to +/- 1 percent change in China’s consumption/investment growth on the average
Asia and China made disproportionate contributions to the slowdown of global trade growth in 2015. China’s import growth slowed starkly, driven by both external and domestic factors, including a rebalancing of demand. Econometric results point to weak investment and rebalancing as the main causes of the import slowdown. Spillover effects from China’s rebalancing are estimated for some 60 countries using value-added trade data, and are found to be more negative on Asia and commodity exporters than others.
, using the spillover estimates of Box 2.1 ( Figure 2.1.1 ). That is, the rebalancing effect accounted for about 12 percent of overall spillovers from China’s growth slowdown on Asia’s growth over the same period.
Impact of Historical Rebalancing on GDP Growth
(Impact in percentage points, due to a 3.1 percentage point increase in Chineseconsumption growth and 2.5 percentage point decrease in Chinese investment growth over nonrebalancing scenario)
Source: IMF staff estimates.
1 AE = advanced economies; EM-COM = commodity-exporting emerging
This paper uses the standard one-sector neoclassical growth model to investigate why China's consumption has been low and investment high. It finds that the low cost of capital has been quantitatively an important factor. Theory predicts that the price of capital may have been significantly distorted in the 1990s and 2000s. The distortion could have been caused by nonperforming loans, borrowing constraints, and uncertainty over changes in government guidance in bank lending. If China is to rebalance growth towards relying more on consumption and less on exports and investment, banking sector reforms and financial market development could, therefore, turn out to be key.
Mr. Steven A Barnett, Ms. Alla Myrvoda, and Mr. Malhar S Nabar
Technology is generating a global convergence. A "big bang" of information—and education as well—is improving human lives. And with global interconnectivity growing by leaps and bounds, we are all witness to a rapid spread of information and ideas. But, as we have seen from the prolonged global financial crisis, our interconnectedness carries grave risks as well as benefits. This issue of F&D looks at different aspects of interconnectedness, globally and in Asia. • Brookings VP Kemal Devis presents the three fundamental trends in the global economy affecting the balance between east and west in "World Economy: Convergence, Interdependence, and Divergence." • In "Financial Regionalism," Akihiro Kawai and Domenico Lombardi tell us how regional arrangements are helping global financial stability. • In "Migration Meets Slow Growth," Migration Policy Institute president Demetrios Papademetriou examines how the global movement of workers will change as the economic crisis continues in advanced economies. • "Caught in the Web" explains new ways of looking at financial interconnections in a globalized world. • IMF Managing Director Christine Lagarde provides her take on the benefits of integration and the risks of fragmentation in "Straight Talk." Also in this issue, we take a closer look at interconnectedness across Asia as we explore how trade across the region is affected by China's falling trade surplus, how India and China might learn from each others' success, and what Myanmar's reintegration into the global economy means for its people. F&D's People in Economics series profiles Justin Yifu Lin, first developing country World Bank economist, and the Back to Basics series explains the origins and evolution of money.