nep-cna New Economics Papers
on China
Issue of 2010‒01‒10
three papers chosen by
Zheng Fang
Ohio State University

  1. The evolution of the Sino-American Co-dependency: modelling a regime switch in a growth setting By Luigi Bonatti; Andrea Fracasso
  2. Will an Appreciation of the Renminbi Rebalance the Global Economy? A Dynamic Financial CGE Analysis By Jingliang Xiao; Glyn Wittwer
  3. "Identifying Shocks in Regionally Integrated East Asian Economies with Structural VAR and Block Exogeneity" By Kiyotaka Sato; Zhaoyong Zhang; Michael McAleer

  1. By: Luigi Bonatti; Andrea Fracasso
    Abstract: This work presents a two-country two-stage growth model capturing the special relationship that has emerged in recent years between the US and China (the so-called BWII regime described by Dooley et al., 2003). The Chinese authorities maintain a competitive (i.e., undervalued) exchange rate in order to sustain the high-productive exporting sectors, foster growth and absorb the large amount of rural workers into the industrial sector. Thus, China runs current account surpluses against the US and accumulates US assets in the form of foreign reserves. The US policy-makers are supposedly more concerned with keeping high the consumption possibilities of the population and exploit the Chinese willingness to finance the US external deficits. We consider three scenarios for the future state of the Sino-American co-dependency. All the scenarios share phase 1, resembling what has actually occurred in recent years, but differ in accordance with what fiscal policy the Chinese authorities adopt, and whether and when China fully liberalizes its capital account and floats the currency (thus starting phase 2). Scenario A is quite optimistic because the Chinese fiscal policy is effective in partially substituting the mercantilist policy undertaken in phase 1 as a fundamental source of demand for tradables and as an engine of growth. Scenario B emphasizes the risks for China of abandoning too early the peg of the exchange rate. Finally, Scenario C shows that a Chinese continuation of the current export-led growth strategy can be economically feasible and lead to the mobilization of the Chinese manpower into the advanced sectors of the economy.
    Keywords: Bretton Woods II, growth, global imbalances, regime switch
    JEL: E42 F33 F41 F43
    Date: 2009
  2. By: Jingliang Xiao; Glyn Wittwer
    Abstract: We use a dynamic CGE model of China with a financial module and sectoral detail to examine the real and nominal impacts of a nominal exchange rate appreciation alone, fiscal policy alone and a combined fiscal and monetary package to redress China's external imbalance. The exchange rate policy alone is ineffective in both the short run and long run at reducing China's current account surplus. Fiscal policy is less effective than a combination of fiscal and monetary policy in reducing the surplus.
    Keywords: dynamic financial CGE, foreign reserves, trade surplus, monetary policy, fiscal policy
    JEL: D58 E52 E62 F31
    Date: 2009–11
  3. By: Kiyotaka Sato (Faculty of Economics, Yokohama National University); Zhaoyong Zhang (School of Accounting, Finance and Economics, Edith Cowan University); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute)
    Abstract: In this paper we use a structural VAR model with block exogeneity to investigate if external shocks originating from the USA played a dominant role in influencing the macroeconomic fluctuations in East Asia during the period 1978-2007. The empirical results show a dynamic effect of external shocks, implying that, even though regional integration appears to be deepening and accelerating, especially after the recent global financial crisis, the influence of US shocks on real output fluctuations in the East Asian region is still very strong. The effects of Chinese shocks show an increasing trend over time, but the impacts are still small and not comparable with those of US shocks. The world oil price shock has become increasingly important in influencing the stability of real output growth in the region. The results from variance decomposition and impulse response analysis confirm the findings. Even though Japanese firms have established production networks in East Asia through trade and investment, and China has also grown rapidly and become a key regional country, the results suggest that US influence in the region is still asymmetric and strong. Therefore, it is difficult to conclude that shocks to the East Asian economies have become more regionally oriented.
    Date: 2009–12

This nep-cna issue is ©2010 by Zheng Fang. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.