How shocks in China’s financial markets affect the global economy
In this paper, Lodge et al. present a comprehensive analysis of China’s influence on global financial markets. The authors use daily financial data from China and the U.S., from 2017 to 2023, to disentangle China-specific structural shocks driving Chinese financial markets and examine the spillover effects across global markets. The authors use an empirical framework that jointly decomposes daily movements in Chinese and US financial asset prices into underlying drivers thereby aiming to better control for possible commonalities. This approach ensures that the estimates of China’s spillover effects do not reflect common factors. Some of their findings include:
- Shocks originating in China have material impacts on global equity markets, but the spillovers are much smaller than those following shocks in the United States or those triggered by shifts in global risk sentiment.
- Shocks from China account for a significant proportion of variation in global commodity prices, more on a par with those of the United States. This is consistent with China’s role in the demand for global energy and non-energy commodities.
- Spillovers from China can be significantly amplified in an environment of heightened global volatility.
China’s footprint in global financial markets
Authors: David Lodge, Ana-Simona Manu, Ine Van Robays
From: Bank of Finland/ECB
Risks to the U.S. from a crisis in China’s property sector
In this commentary, Akinci et al. explore the potential impact on U.S. economic activity and inflation if China’s property sector were to experience a crisis leading to an economic hard landing and financial turmoil. Before the recent slump, property-related activity accounted for about one-quarter of China’s GDP, an outsized share by international standards. Property-related credit represents roughly one-quarter of total debt outstanding, and property comprises about two-thirds of household assets in China. Given these figures, a crisis in the property sector is seen as a plausible trigger for a broader economic and financial crisis in China. The authors use a Bayesian VAR model to explore the impact on the U.S. from a scenario where China’s GDP falls to zero in 2024. They find that in such a scenario:
- Consistent with the findings of Lodge et al. above, a sudden plunge in Chinese domestic demand growth will lead to sharp falls in global commodity prices and Chinese exports as well as to a weaker demand for China’s worldwide value chain partners. The deterioration in global trade will feed into a similar deterioration in U.S. trade volumes.
- The U.S. dollar will appreciate, reflecting risk-off behavior among global investors, who seek refuge in U.S. financial markets and U.S. dollar assets. The stronger dollar, in turn, contributes to a tightening in global financial conditions.
In conclusion, while a property sector crash in China could pose downside risks to U.S. growth and inflation, the authors view the scenario as less likely than an upside scenario. The authors believe that Chinese authorities have considerable tools and policy space to manage the economy and mitigate financial risks, despite becoming more constrained.
What Happens to U.S. Activity and Inflation if China’s Property Sector Leads to a Crisis?
By: Ozge Akinci, Hunter Clark, Jeff Dawson, Matthew Higgins, Silvia Miranda-Agrippino, Ethan Nourbash, Ramya Nallamotu – Federal Reserve Bank of New York
