| Abstract: |
With exports almost half of its GDP and most of these directed to Europe and
North America, negative financial shocks in those regions might be expected to
retard China’s growth. Yet mitigating factors include the temporary flight of
North American and European savings into Chinese investment and some
associated real exchange rate realignments. These issues are explored using a
dynamic model of the global economy. A rise in American and European financial
intermediation costs is shown to retard neither China’s GDP nor its import
growth in the short run. Should the Chinese government act to prevent the
effects of the investment surge, through tighter inward capital controls or
increased reserve accumulation, the associated losses would be compensated by
a trade advantage since its real exchange rate would appreciate less against
North America than those of other trading partners. The results therefore
suggest that, so long as the financial shocks are restricted to North America
and Western Europe, China’s growth and the imports on which its trading
partners rely are unlikely to be significantly hindered. |