## The rise of China in the coming decades will have far-reaching consequences—the world should get ready

## Source details

**Canonical URL:** [The rise of China in the coming decades will have far-reaching consequences—the world should get ready](https://www.imf.org/-/media/files/publications/fandd/article/2019/june/rise-of-china-jin.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/fandd/article/2019/june/rise-of-china-jin.pdf.md)
- [Structured JSON version](/-/media/files/publications/fandd/article/2019/june/rise-of-china-jin.pdf.json)

---

### China’s projected status by 2040
- Under plausible projections, China will have firmly established itself as the largest economy in the world, with 60 to 70 percent of the US income level.
- In 20 years, China will still be a developing economy by many measures: its financial development will lag its economic development, and many economic and policy distortions may still persist.
- The world should prepare for China to be its first systemic emerging market economy—bringing greater volatility and uncertainty as it becomes more intermeshed with global financial markets.

### Channels, shocks, and empirical findings
- Currently, China already sends shocks to the rest of the world despite its small international financial exposure.
- My research with Yi Huang shows that both policy shocks (monetary and fiscal) and shocks of policy uncertainty spill over internationally.
- During 2000–18, Chinese policy uncertainty shocks significantly affected:
  - world industrial production and commodity prices,
  - global stock prices and bond yields,
  - the MSCI World Index,
  - financial volatility.
- Structural features that amplify shocks:
  - In China today, 70 percent of investors in capital markets are retail investors, quick to react to noise and changes in sentiment.
  - Mercurial stock markets and volatile exchange rates may become the rule, not the exception.
- As China’s financial channels broaden (cross-border bank lending, portfolio holdings, capital flows, a more dominant renminbi), shocks will propagate more swiftly, be amplified, and expand through diverse channels.

### Historical analogy and implications
- The rise of China today bears much similarity to the ascent of the United States in the late 19th century:
  - Rapid growth coupled with unsophisticated capital markets,
  - Corporate governance problems and recurring banking crises,
  - Weak financial intermediaries and shortage of financial assets,
  - Absence of a lender of last resort impeded efficient capital mobilization.
- The vagaries of a large developing economy can be transmitted internationally, as occurred with the US financial panic in 1873.

### Three central questions for the future
- Desirability of China’s rapid financial liberalization and opening up:
  - For China, liberalization and integration may lead to better allocation of financial capital and constrain opaque or erratic policies by exposing them to global scrutiny.
- What the world wants, and whether it can insist on it:
  - Tension persists between domestic policies and international imperatives; major central banks (example: the Federal Reserve) assert domestic mandates despite substantial global effects.
  - Is it realistic to ask China to prioritize the world’s interests over its own?
- Need for international cooperation:
  - Cooperation will be imperative if the Federal Reserve and the People’s Bank of China embrace differing and potentially conflicting mandates.
  - Historical cooperation efforts (Bretton Woods, Group of Seven, the 1985 Plaza Accord) are less prominent today but crucially need to return.

### Policy implications and recommendations
- The world should:
  - Brace for greater volatility and uncertainty tied to China’s deeper integration.
  - Prepare for shocks distinctive to developing economies but occurring on a much larger scale.
  - Recognize that every significant policy move, stock market panic, and cyclical swing in China can plausibly diffuse through global financial networks.
  - Revive and strengthen international cooperation frameworks to manage divergent central bank mandates and cross-border spillovers.
- For China and global policymakers:
  - Consider the sequencing and design of financial liberalization to mitigate amplification of shocks.
  - Account for policy uncertainty as a first-order risk to sensitive financial markets.

### Potential global benefits from China’s ascent
- China can serve as an anchor for demand in the world, especially given persistent aggregate demand deficits in advanced economies.
- China can provide additional diversification for global portfolios and currencies; the renminbi could be an alternative reserve currency.
- A central question becomes not only “Is China ready to open up?” but also “Is the world ready?”

*Keyu Jin, Finance & Development, June 2019.*

---


_Source: https://www.imf.org/-/media/files/publications/fandd/article/2019/june/rise-of-china-jin.pdf_