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How much China will be affected by a simultaneous G−3 slowdown?

Fri, Oct 10 2008, 09:58 GMT
by BBVA Bancomer Team

BBVA Bancomer

• - China’s business cycle synchronization with G-3 economies has increased considerably in the 2000s. Because of its high export dependency and its relatively small consumption base, China will not be immune to a global slowdown. 

• - Our estimates indicate that the combined G-3 shocks through output and price explain about over one quarter of the variations in China’s output and less than 5% of the variations in China’s price developments within one year. 

• - Translating this impact in terms of real GDP growth rate, we find that a simultaneous G-3 economic slowdown by one percentage point will lead to a Chinese economic slowdown by 0.73 percentage point one year later. 

• - Our analysis also reveals that the Chinese economy is expected to decelerate in the next two years according to the historical patterns of China’s political business cycle. If this phenomenon is compounded by a severe and a protracted external economic slowdown, China’s growth perspectives will be affected even more in the coming years. 

• - This, however, does not mean that China’s economic growth will necessarily slow down substantially in the coming years. Given its favorable fiscal conditions and tight monetary policy stance coming into this global downturn, China is actually well-positioned to use both fiscal and monetary policy instruments to stimulate the economy.

• - Factoring in these considerations, we maintain our view that China’s growth will slow further going forward, but it can still be maintained at a pace of over 9% this year and around 8% in 2009.

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Published on  Fri, Oct 10 2008, 10:04 GMT