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The Sunday Paper – What Happens in China Does Not Stay in China

As an in-part follow up to last weeks’ review of the IMF’s annual China report the work today, from the U.S. Federal Reserve last November, takes a closer look at how Chinese economic activity impacts the world*.

[*The IMF estimated in their report a 1% change in China’s GDP implied between a 0.25%~0.4% global spillover, with a three year lag. For 2023 specifically though they’re now saying China could contribute 1/3 of global growth. IMF latest on China ]

The paper from William L. Barcelona (et al.) claims to be a first in terms of closely quantifying the effects China’s domestic economic fluctuations on the global economy.

You’d think the notion that China’s economy affects others would be an obvious one, but you’d be mistaken. Previous work on how China plugs into the rest of the world has struggled to find a reliable link.

Mr. Barcelona and his associates show the relationship is there, and it’s significant, but past work has looked at the wrong or misleading indicators. A big problem has been China’s official GDP data, which in recent years has become suspiciously smooth.

By constructing their own, and more crunchy, GDP measure AND creating a proprietary measure for the domestic credit impulse a more satisfying picture of causality emerges.

The casual reader only needs to know China affects the global business cycle in a bigger way than many have hitherto believed.

The biggest impact is transmitted by demand and this is especially important now as in 2023 China is likely to lead the pack of the world’s major economies in terms of GDP growth, and thus demand.

Every schoolchild knows what’s good for America, economically speaking, is good for the world. The paper today suggests we should now teach, in addition, what’s good for China is good for the world too.

You can access the work in full via this link What Happens in China.

Happy Sunday.

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