The Transition of China to Sustainable Growth – Implications for the Global Economy and the Euro Area

66 Pages Posted: 31 Jan 2018

See all articles by Alistair Dieppe

Alistair Dieppe

European Central Bank (ECB)

Robert Gilhooly

Bank of England

Jenny Han

Bank of England

Iikka Korhonen

Bank of Finland - Institute for Economies in Transition (BOFIT)

David Lodge

European Central Bank (ECB)

Date Written: January 26, 2018

Abstract

China’s rise has been the economic success story of the past four decades but economic growth has been slowing and domestic imbalances have widened. This paper analyses the recent evolution of China’s imbalances, the risks they pose to the economic outlook and the potential impact of a transition to sustainable growth in China on the global and euro area economies. The paper documents China’s heavy reliance on investment and credit as drivers of growth, which has created vulnerabilities in a number of sectors and has been accompanied by increased complexity and leverage in the financial system. China retains some buffers, including policy space, to cushion against adverse shocks for the time being, but additional structural reforms would facilitate a shift of China’s economy onto a sustainable and strong growth trajectory in the medium term. China’s size, trade openness, dominant position as consumer of commodities and growing financial integration mean that its transition to sustainable growth is crucial for the global economic outlook. Simulation analysis using global macro models suggests that the spillovers to the euro area would be limited in the case of a modest slowdown in China’s GDP growth, but significant in the case of a sharp downturn. Sensitivity analysis underscores that the spillovers are dependent on the strengths of the various transmission channels, as well as the policy reaction by central banks and governments.

Keywords: economic growth, rebalancing, China, imbalances, spillovers

JEL Classification: E21, E22, E27, F10, F47, O11, O53

Suggested Citation

Dieppe, Alistair and Gilhooly, Robert and Han, Jenny and Korhonen, Iikka and Lodge, David, The Transition of China to Sustainable Growth – Implications for the Global Economy and the Euro Area (January 26, 2018). ECB Occasional Paper No. 206, Available at SSRN: https://ssrn.com/abstract=3113109 or http://dx.doi.org/10.2139/ssrn.3113109

Alistair Dieppe (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Robert Gilhooly

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Jenny Han

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Iikka Korhonen

Bank of Finland - Institute for Economies in Transition (BOFIT) ( email )

P.O.Box 160
Helsinki 00101
Finland

David Lodge

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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