nep-cna New Economics Papers
on China
Issue of 2008‒05‒31
sixteen papers chosen by
Zheng Fang
Ohio State University

  1. China’s Growing Economic Activity in Africa By Hany Besada; Yang Wang; John Whalley
  2. Has trade with China affected UK inflation? By Wheeler, Tracy
  3. How Do Macroeconomic Developments in Mainland China Affect Hong Kong's Short-term Interest Rates? By Dong He; Frank Leung; Philip Ng
  4. Do External Political Pressures Affect the Renminbi Exchange Rate? By Li-gang Liu; Laurent Pauwels; Jun-yu Chan
  5. Market Expectation of Appreciation of the Renminbi By Cho-Hoi Hui; Chi-Fai Lo; Tsz-Kin Chung
  6. It is better to be the head of a chicken than the tail of a phoenix: a study of concern for relative standing in rural China By Carlsson, Fredrik; Qin, Ping
  7. A New Keynesian Model for Analysing Monetary Policy in Mainland China By Li-gang Liu; Wenlang Zhang
  8. Service Exports: The Next Engine of Growth For Hong Kong? By Frank Leung; Kevin Chow; Jessica Szeto; Dickson Tam
  10. Exchange Rate Pass-Through to Domestic Inflation in Hong Kong By Li-gang Liu; Andrew Tsang
  11. How Large is the Wealth Effect on Hong Kong¡¦s Consumption? Evidence from a Habit Formation Model of Consumption By Li-gang Liu; Laurent Pauwels; Andrew Tsang
  12. Hong Kong's Consumption Function Revisited By Li-gang Liu; Laurent Pauwels; Andrew Tsang
  13. Is the Hong Kong Dollar Real Exchange Rate Misaligned? By Frank Leung; Philip Ng
  14. Assessing the Credibility of The Convertibility Zone of The Hong Kong Dollar By Laurence Fung; Ip-wing Yu
  15. On the Decomposition of Polarization Indices: Illustrations with Chinese and Nigerian Household Surveys By Abdelkrim Araar
  16. A Leading Indicator Model of Banking Distress ¡V Developing an Early Warning System for Hong Kong and Other EMEAP Economies By Jim Wong; Eric Wong; Phyllis Leung

  1. By: Hany Besada; Yang Wang; John Whalley
    Abstract: Trade between the whole of Africa and China (imports and exports summed) grew from $10.6 billion to $73.3 billion between 2000 and 2007, and between Sub-Saharan Africa and China from $7 billion to $59 billion over the same period. China is now Africa's third largest trading partner behind the EU and the US. The Chinese FDI stock in Africa has grown from $49 million in 1990 to $2.6 billion in 2006. On the basis of these data, one frequently hears the claim that China is now a dominant influence in Africa. Here we both evaluate such claims, and assess what factors underlay this phenomenon. We suggest that while the annual growth rates of trade and investment flows are high (around 30% per year sine the late 1990's), the levels are still considerably smaller than such claims might suggest. China in 2006 accounted for only $520 million of inward FDI compared to a total from all sources of $36 billion, around 1.4% of total FDI inflows to Africa; and only 8.6% of African exports and 9.6% of African imports. African interdependence with China thus remains proportionally smaller than that for most other geographical areas, but is growing rapidly. Factors behind this growth are discussed in the text.
    JEL: F13 F59 O53 O55
    Date: 2008–05
  2. By: Wheeler, Tracy (Monetary Policy Committee Unit, Bank of England)
    Abstract: This paper investigates empirically whether the level or growth of cheap imports from China has had an impact on UK inflation. We use two methods; the first calculates UK weighted world export price inflation as the sum of the effect of the inflation level in the UK's trading partners and the effect of substituting imports from more expensive countries with imports from countries with lower price levels. The second estimates these two effects on UK inflation using panel regressions. The results from the first method suggest that the substitution of imports from more expensive countries with imports from China reduced UK weighted world export price inflation by an average of -0.75 percentage points per annum from 2000 to 2004. Similarly, the panel regressions suggest that over the 1997-2005 period this substitution had a small but significant downward impact on UK CPI inflation. However, the same regressions also suggest that higher inflation in imports from China than in imports from other countries has put upward pressure on some components of UK CPI inflation. As this upward 'inflation effect' is likely to have outweighed the downward 'substitution effect' the regressions suggest that the overall effect of Chinese imports on UK CPI inflation from 1997-2005 was positive.
    Keywords: Inflation; China; Imports
    JEL: E31 F15
    Date: 2008–02
  3. By: Dong He (Research Department, Hong Kong Monetary Authority); Frank Leung (Research Department, Hong Kong Monetary Authority); Philip Ng (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper studies the significance of Mainland-related shocks in determining Hong Kong money market interest rates after controlling for the influences of US variables. Analysis using a vector auto-regression model suggests that an unexpected rise in the Mainland policy interest rate, or a higher-than-expected growth in Mainland output or money supply, in general produces a positive and hump-shaped effect on the three-month HIBOR. Forecast error variance decomposition shows that US shocks still dominate, but Mainland shocks have become more important in accounting for the unexpected fluctuations in HIBOR in recent years. A historical decomposition shows that from autumn 2003 to spring 2005 the large negative spread between HIBOR and LIBOR was mainly due to Mainland factors. Thus, while the HIBOR-LIBOR spread is expected to be bounded inside a band that reflects the width of the Convertibility Zone of the Linked Exchange Rate system, Mainland-related shocks could exert a significant influence on the actual size of the spread.
    Keywords: Hong Kong, HIBOR, Linked Exchange Rate system
    JEL: E4 F36
    Date: 2007–11
  4. By: Li-gang Liu (Research Department, Hong Kong Monetary Authority); Laurent Pauwels (Research Department, Hong Kong Monetary Authority); Jun-yu Chan (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper investigates whether external political pressures calling for faster renminbi (RMB) appreciation have any statistically significant effect on both the daily returns and the conditional volatility of the RMB central parity rate. We construct various external pressure indicators according to the sources of foreign political pressures pertaining to the RMB exchange rate, with a special emphasis on the pressures originated in the United States. After controlling for the underlying domestic factors, we find that neither the overall foreign pressure indicator nor the US-specific pressure indicator has any significant influence on RMB¡¦s daily returns. However, there is strong evidence to suggest that external pressures, and especially those from US sources, have a statistically significant impact on the conditional volatility of the RMB exchange rate. In other words, even though external pressures do not seem to have systematic influence on the speed of the RMB appreciation, they do seem to influence the uncertainty in the daily changes of the RMB exchange rate.
    Keywords: Renminbi exchange rate, Conditional volatility, Event studies, Macroeconomic news or surprises
    JEL: F31 G10
    Date: 2008–05
  5. By: Cho-Hoi Hui (Research Department, Hong Kong Monetary Authority); Chi-Fai Lo (Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong); Tsz-Kin Chung (Department of Physics, The Chinese University of Hong Kong)
    Abstract: This paper proposes a path-dependent approach for estimating maximum appreciations of the renminbi expected by the market based on first-passage-time distributions. Using market data of the renminbi spot exchange rates, non-deliverable forward rates and currency option prices from 21 July 2005 (the reform of the exchange rate regime) to 28 February 2008 for model parameters, the maximum appreciations of the renminbi estimated under the proposed approach show that the market expected another large movement of the exchange rate during the 14 months after the reform. Subsequently, the few occasions of appreciations beyond the expected maximums coincided with trade-related issues and speculation that greater momentum of appreciation would be allowed by the authorities. The PBoC¡¦s measures were however largely incorporated into the derivatives¡¦ prices. The proposed approach can be used to gauge the range of appreciations of the renminbi anticipated in the market and to identify any exchange rate movements beyond market expectations.
    Keywords: renminbi exchange rate, first-passage-time distributions, currency options
    JEL: F31 G13
    Date: 2008–04
  6. By: Carlsson, Fredrik (Department of Economics, School of Business, Economics and Law, Göteborg University); Qin, Ping (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper examines the concern for relative standing among rural households in China. We use a survey-experimental method to measure to what extent poor Chinese farmers care about their relative income and find that the respondents care to a high degree. Compared to previous studies in developed countries, the concern for relative standing seems to be equally strong among rural households in China. This should be seen in the light of the rapid change China has undergone, with high growth, increased inequality, and the highest urban-rural income ratio in the world. Thus, the rural population, which is lagging behind, is suffering not only from the low absolute income but also from low relative income.<p>
    Keywords: Relative standing; China; Inequality
    JEL: C93 D63
    Date: 2008–05–22
  7. By: Li-gang Liu (Research Department, Hong Kong Monetary Authority); Wenlang Zhang (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper adopts a three-equation New Keynesian model to evaluate the appropriateness of China's monetary policy framework. Our simulation results show that a hybrid rule that relies on both interest rate and quantity of money to conduct monetary policy appears to be more suitable than its alternatives at the current stage of economic and financial market development. Our simulation results also show that a sharp appreciation of the renminbi exchange rate would be disruptive to the inflation and output processes of the economy, despite its effectiveness in curbing inflation.
    Keywords: Monetary Policy Rule, New Keynesian Model, China
    JEL: E42 E52
    Date: 2007–11
  8. By: Frank Leung (Research Department, Hong Kong Monetary Authority); Kevin Chow (Research Department, Hong Kong Monetary Authority); Jessica Szeto (Research Department, Hong Kong Monetary Authority); Dickson Tam (Research Department, Hong Kong Monetary Authority)
    Abstract: Increasing economic integration with Mainland China has contributed to the rapid expansion of service exports in Hong Kong. Growing at the current pace of 10-20% per annum, service exports would be a key contributor to GDP in the coming years, thanks to vibrant expansion in offshore trade and strong growth in financial service exports and inbound tourism. Our projections show that, if the size of the Mainland economy doubles over the next decade, service exports could increase from the current 40% of GDP to 50% of GDP by 2016, probably the fastest growing component in GDP.
    Keywords: Trade in services, Offshore trade, Hong Kong, Mainland China
    JEL: F1 F2
    Date: 2008–04
  9. By: Tingsong Jiang; Warwick McKibbin
    Abstract: A Free Trade Area of the Asia-Pacific (FTAAP) has been proposed as a long-term prospect by the Asia-Pacific Economic Cooperation (APEC). This paper examines the impact of the FTAAP on the national and regional economies in China using a suite of general equilibrium models: APG-Cubed, a dynamic global model; GTAP, a static global model; and CERD, a static China model with regional dimension. The impact on the Chinese economy of the APFTA is also compared with those of other forms of FTAs such as the ASEAN-China FTA (ACFTA) and the East Asia FTA (EAFTA). China benefits from all three FTAs, and the eastern region gains the most. It is also found that China's benefit increases along with the increase in coverage of the FTAs, that is, the APFTA has the biggest positive impact on the Chinese economy, among the three FTAs considered in this study. Sector-wise, textile, clothing and footwear sector gains the most from the FTAAP, while motor vehicle and parts sector loses the most.
    Date: 2008–05
  10. By: Li-gang Liu (Research Department, Hong Kong Monetary Authority); Andrew Tsang (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper estimates pass-through of exchange rate changes to domestic inflation in Hong Kong in a two-step approach. We first estimate exchange rate pass-through to import prices and then from import price to domestic inflation using a Phillips-Curve model. We find that Hong Kong¡¦s exchange rate pass-through to import prices is relatively high compared to the OECD average, although Hong Kong also witnessed a decline of pass-through after 1991. With respect to exchange rate pass-through to domestic prices, we find that a 10% depreciation of the US dollar against all currencies except for the Hong Kong dollar would lead domestic prices to increase by 0.82 and 1.61 percent in the short run and medium run, respectively. These results are also broadly consistent with those obtained from a calibration exercise that estimates exchange rate pass-through to domestic prices via channels of the tradable and non-tradable goods.
    Keywords: Exchange rate pass-through, Phillips Curve, Hong Kong
    JEL: F3 F4
    Date: 2008–03
  11. By: Li-gang Liu (Research Department, Hong Kong Monetary Authority); Laurent Pauwels (Research Department, Hong Kong Monetary Authority); Andrew Tsang (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper first investigates whether there is a cointegration relationship between Hong Kong¡¦s consumption and wealth using the latest cointegration tests that allow for structural breaks. Our tests show there is only limited empirical support for the existence of a cointegration relationship between consumption and wealth (including both housing and financial wealth). These test results thus cast doubt on the validity of the estimates based on the cointegration result. We then estimate a structural equation linking consumption and wealth derived from a habit formation consumption model. Our estimates show that the short run and the long run marginal propensities to consume out of a one Hong Kong dollar increase in total wealth are about 0.14 and 0.6 cents, respectively. These values are much smaller than those previously estimated using the cointegration approach. The housing wealth effect in Hong Kong is also relatively small compared to estimates for the United States obtained using a similar habit formation specification.
    Keywords: Cointegration test with structural breaks, habit formation model, wealth effect, Hong Kong
    JEL: E21 E32
    Date: 2007–12
  12. By: Li-gang Liu (Research Department, Hong Kong Monetary Authority); Laurent Pauwels (Research Department, Hong Kong Monetary Authority); Andrew Tsang (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper revisits the relationship among consumption, income and wealth using Hong Kong data. We find that the permanent income hypothesis is weakly supported by Hong Kong¡¦s consumption data prior to 1997, but it is not supported for the sample period after 1997 and the whole sample period spanning from 1984 to 2006. Furthermore, we find that both anticipated and unanticipated income and wealth effects have influences on Hong Kong¡¦s consumption. While temporary tax changes may have some impact on consumption of durable goods, the evidence that they also affect overall consumption remains limited.
    Keywords: Permanent income hypothesis, consumption smoothness, anticipated and unanticipated effects
    JEL: E21 E32
    Date: 2007–11
  13. By: Frank Leung (Research Department, Hong Kong Monetary Authority); Philip Ng (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper estimates the equilibrium path of the Hong Kong dollar real effective exchange rate (REER) and compares it with the actual path of the Hong Kong dollar REER to assess the extent of real exchange rate misalignment. Empirical results from various approaches of exchange rate assessment adopted in this study generally suggest that there was no obvious evidence of exchange rate misalignment for the Hong Kong dollar in 2006. This is consistent with the observation that there were no obvious signs of macroeconomic imbalances in the Hong Kong economy.
    Keywords: Real effective exchange rate, Hong Kong dollar
    JEL: F32 F41
    Date: 2007–12
  14. By: Laurence Fung (Research Department, Hong Kong Monetary Authority); Ip-wing Yu (Research Department, Hong Kong Monetary Authority)
    Abstract: The features under the two-sided Convertibility Zone of the Hong Kong dollar resemble in many ways the target zone exchange rate regime in the literature. Following Tronzano et al. (2000), this paper utilises a Bayesian extension of the Svensson (1991) test, which takes into account the exchange rate movement and the differential between domestic and foreign interest rates, to assess the credibility of the Convertibility Zone since it was introduced in May 2005. The empirical evidence suggests that the Hong Kong Monetary Authority has been successful in building a high degree of credibility in maintaining the Convertibility Zone.
    Keywords: Bayesian Analysis, Credibility, Convertibility Zone, Markov Chain Monte Carlo
    JEL: C11 C15 C22 F31
    Date: 2007–12
  15. By: Abdelkrim Araar
    Abstract: This paper explores the link between polarization and inequality and proposes some analytical methods to decompose the Duclos, Esteban, and Ray (2004) polarization index by population groups or income sources. In some cases, the decomposition methods were extend to the Esteban and Ray (1994) one. The main aim of these decomposition methods is to extend the interpretation derived from polarization indices to that of contribution components. Results drawn from Chinese data conclude that even if inequality has increased sharply during the last two decades, the pure polarization component was remained constant or even decreased on average. On the other hand, results from the 2004 Nigerian survey conclude that the population is spatially polarized, and this, based on geo-ecological zones. Furthermore, the two income sources, namely, Employment income and Non farm business income, significantly contribute to total polarization.
    Keywords: Polarization, Equity, Inequality, Decomposition
    JEL: D63 D64
    Date: 2008
  16. By: Jim Wong (Research Department, Hong Kong Monetary Authority); Eric Wong (Research Department, Hong Kong Monetary Authority); Phyllis Leung (Research Department, Hong Kong Monetary Authority)
    Abstract: This study develops a probit econometric model to identify a set of leading indicators of banking distress and estimate banking distress probability for Hong Kong and other EMEAP economies. Macroeconomic fundamentals, currency crisis vulnerability, credit risk of banks and companies, asset price bubbles, credit growth, and the occurrence of distress of other economies in the region are found to be important leading indicators of banking distress in the home economy. The predictive power of the model is reasonably good. A case study of Hong Kong based on the latest estimate of banking distress probability and stress testing results shows that currently the banking sector in Hong Kong is healthy and should be able to withstand well certain possible adverse shocks. Under some extreme shocks originating from real GDP growth and property prices such as those that occurred during the Asian financial crisis, the model indicates a non-negligible risk of an occurrence of banking distress in Hong Kong. However, the chances of the occurrence of such severe events are extremely low. Simulation results also suggest that compared to the period before the Asian financial crisis, the local banking sector is currently more capable of withstanding shocks similar to those that occurred during that crisis. The study also finds that banking distress is contagious, suggesting that to be effective in monitoring banking distress, close cooperation between central banks should be in place.
    Keywords: Banking distress, Asia Pacific economies, econometric model
    JEL: E44 E47 G21
    Date: 2007–12

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