## 1. Spillover Results: Unitary Rebalancing

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### Major findings on China and the 2015 global trade slowdown
- Global trade growth slowed in recent years both relative to income growth and relative to its past growth (Constantinescu and others 2015).
- The slowing accelerated in early 2015, particularly in China and neighboring Asian countries.
- China’s contribution to the global trade slowdown was unusually large in 2015, in contrast to 2008–09 when all regions contributed to the trade slowdown.
- In 2015, China made a big negative contribution to global goods import volume growth, while both the United States and euro area made sizable positive contributions to global import volume growth.
- On the export side in 2015, China and Asia made by far the largest negative contribution to the slowdown in global export growth.
- China’s prominence reflects both its rising weight in world trade and its role as a hub in global value chains (GVCs).

### Evidence on China’s rising role in global trade and GVCs
- World’s exports with China as the final destination (value-added terms) increased from 1 percent of total exports to 7 percent in 2011.
- For Asian countries excluding China, the share of exports with China as the final destination was 16 percent in 2011—equal to the United States.
- Since 2005, China’s forward and backward GVC linkages increased:
  - In several key GVCs, Chinese domestic value added now amounts to 5–12 percent of the world total, whereas the median country contributes less than 1 percent of the world total.
  - China’s backward linkages now range between 15–40 percent of the global share in about 10 large GVCs.
  - The import content China receives related to electronics for re-exporting now amounts to almost 40 percent of the total in world’s electronics GVC trade, compared to 0.3 percent backward linkages of the median economy in the electronics GVC based on a sample of 62 countries.

### Drivers of China’s weak import growth
- The surprising weakness of China’s import growth relative to its GDP growth is documented.
- Slowing growth of investment and exports was the key driver of China’s import weakness; the slowdown in aggregate GDP growth alone did not explain it well.
- Over the past decade, about a half of China’s import growth slowdown could be attributed to rebalancing of demand composition away from investment and exports toward consumption.
- Structural changes affecting import demand include:
  - External rebalancing (from export-driven to domestic demand driven-growth),
  - Internal rebalancing (from investment-based to consumption-oriented growth),
  - On-shoring (substituting imported goods by domestically-produced goods).

### Box 2 — Can China Explain Asia’s Export Slowdown? (summary)
- Export growth in Asia slowed markedly in 2015; Asia (excluding China) is identified as the largest contributor to the slowdown in global export growth over 2014–15.
- Regional export growth dropped to an average growth rate of 4 percent from 2012 to 2014, after averaging 11 percent during the decade before the global financial crisis.
- Correlation between export growth and trade-partner GDP growth declined over 2012–15 for many Asian countries; the decline was larger for countries with tighter GVC links with China.
- Regression on the scatter: y = -0.0381x -0.2164; R² = 0.3654.
- Proposed channels:
  - China as source/transmitter of shocks (global demand and domestic demand moderation; China’s GDP growth slowed to 6.9 percent in 2015).
  - Composition channels: rebalancing (consumption share in GDP rose by 1½ percentage points since late 1990s; investment growth halved since 2011) and on-shoring (processing imports to total exports ratio declined, with acceleration in 2015).
  - Exchange rate channel: RMB REER appreciation trend since 2005 reform, but analyses find no statistically significant role for REER appreciation over past several years in import slowdown.
- Interpretation: GVC linkages with China and compositional changes (rebalancing and on-shoring) help explain Asia’s weaker export sensitivity to partner income and the large negative contribution of non-China Asia to the 2015 global export-volume slowdown.

### Box 3 — Footprints of China’s Rebalancing in Global Trade (summary)
- Trade data show signs of rebalancing from investment toward consumption; consumption imports’ average growth increased much faster than the world average, while capital goods imports contracted sharply.
- Slowdown in China’s imports since late 2014 driven by goods import contraction; service imports remained strong.
- Empirical strategy:
  - Construct import-adjusted demand (IAD) using import intensities of C, G, I, X (normalized to sum to one).
  - Estimate import regressions using IAD, GDP, and domestic demand; use OLS and dynamic OLS; robust standard errors.
- Import intensities:
  - Investment and exports more import-intensive than consumption.
  - Intensities peaked in 2005, trended down thereafter with short-lived 2010 recovery; pattern consistent with on-shoring.
- Fit and elasticities:
  - IAD generally explains trade flows best; income elasticity estimated around 1.5 to 2 depending on specification and sample.
  - IAD-based fitted values track the 2009 collapse well but explain only part of the 2015 contraction (input-output tables available only up to 2011).
- Selected regression coefficients (goods imports, yoy growth, national accounts):
  - IAD coefficient 1.924*** (9.508); Onshoring 0.559*** (7.761); GFC dummy -0.054** (-2.526); R-squared 0.927; Observations 385.
  - Comparable GDP model: GDP coefficient 2.147*** (5.102); Onshoring 0.526*** (5.518); R-squared 0.851; Observations 338.
  - Goods-and-services model: IAD coefficient 1.715*** (10.133); Onshoring 0.411*** (7.404); GFC dummy -0.079*** (-5.381); R-squared 0.938; Observations 385.
  - REER coefficients vary in sign and significance across specifications; for post-2005 period REER often statistically insignificant.
- Decomposition of import slowdown (2006–10 vs 2011–15):
  - Average goods import growth declined by 6.8 percentage points.
  - IAD predicts a decline of 7.2 percentage points.
  - Decomposition (2012–2015 over 2006–2011, in percentage points):
    - Imports: -6.8
    - IAD: -7.2
      - Domestic Demand: -5.8
        - Consumption: -0.7
        - Government: -1.2
        - Investment: -3.9
      - External Demand: -1.5
    - Onshoring: 0.5
    - Residual: -0.1
    - Net effect: -3.6
  - Conclusion: Rebalancing accounts for about half of the actual import slowdown over the period.
- Caveats: input-output tables only through 2011; on-shoring proxy (processing imports as share of exports) may have endogeneity; TiVA-based measures show similar patterns in overlapping periods.
- Rebalancing scenarios:
  - Unitary rebalancing: consumption growth +1 percentage point, investment growth -1 percentage point (growth-neutral given similar GDP shares).
  - Near term: overall growth lower under rebalancing vs counterfactual.
  - Medium term: rebalancing yields higher and sustainable growth; positive gains materialize starting in 2019.
- Trade exposure (TiVA, 62 countries, 1995–2011):
  - Regional patterns (2011): Asia’s exposure to China’s investment ≈ 1.8 times its exposure to China’s consumption; Non-Asia’s exposure to China’s investment ≈ 1.5 times its exposure to China’s consumption.
  - Country variation: Taiwan Province of China substantially exposed to China’s investment; New Zealand expanded consumption-goods and services exports to China and is better positioned to absorb rebalancing.
- Spillover methodology: baseline country-specific OLS (annual 1995–2011) estimates elasticity of domestic value-added exports (share of GDP) with respect to China’s consumption or investment (logs). Sensitivities combined with projected China consumption/investment differentials yield net changes in exports to China; positive net change = gain from rebalancing, negative = loss.

### Definition and experiment design (unitary rebalancing)
- Unitary rebalancing: consumption growth +1 percentage point and investment growth -1 percentage point (growth-neutral under similar GDP shares).

### Impact on value-added exports to China (first-round effects)
- Average regional impacts (unitary rebalancing):
  - Asia and commodity exporters are most negatively impacted compared with other regions and groups.
- Country heterogeneity:
  - Economies closely integrated to China through GVCs and exposed heavily to China’s investment demand (e.g., Taiwan Province of China and Korea) are most adversely affected.
  - New Zealand benefits because it exports mainly consumption-related products to China.
- Cross-sample finding:
  - Spillovers hinge on a partner country’s export profile to China; countries more exposed to China’s investment demand lose more from unitary rebalancing.

### Estimating GDP growth spillovers (method and key econometric results)
- Two-step estimation:
  1. Estimate shocks to China’s consumption growth and investment growth via a four-variable VAR (global GDP, Chinese GDP growth, Chinese consumption growth, Chinese investment growth) annually.
  2. Estimate partner-country GDP growth responses to those shocks, interacting China demand shocks with bilateral trade linkages measured as domestic value added exported for Chinese final consumption (percent of country GDP). Controls include VIX and global commodity prices. Panel period: 1995–2014.
- Key coefficients from Table 4 (Dependent variable: GDP growth of country i):
  - Year 1:
    - China investment growth shock × Trade exposure: 0.019***
    - China investment growth shock: 0.048***
    - China consumption growth shock × Trade exposure: 0.002
    - China consumption growth shock: 0.041**
  - Year 2:
    - China investment growth shock × Trade exposure: 0.021***
    - China investment growth shock: 0.025**
    - China consumption growth shock × Trade exposure: 0.019*
    - China consumption growth shock: 0.021
  - Additional details:
    - Country fixed effects: Yes
    - Time fixed effects: Yes
    - Observations: 1,140 (both specifications)
    - R-squared: 0.267 and 0.224
  - Statistical notes:
    - Interaction between investment shock and trade linkages significant at 1 percent.
    - Consumption interaction alone not significant, but consumption interaction and consumption shock jointly significant at 1 percent (F statistic = 8.77).

### GDP growth exposure to unitary rebalancing (aggregate and distributional findings)
- Using estimated coefficients and value-added trade data fixed at 2011:
  - A +1 percentage point shock to China’s consumption growth and -1 percentage point shock to China’s investment growth yields an overall negative impact on GDP growth of the average economy in the sample in the near term.
  - Countries more exposed to China’s investment demand are affected more adversely, despite the positive consumption shock.
  - Average Asian economy experiences a larger decline in growth given heavy reliance on value-added exports tied to China’s fixed investment versus the average non-Asian economy.
  - Average commodity exporting emerging economy sustains higher adverse growth impact from +/- 1 percent changes in China’s consumption/investment growth than other emerging economies or the average advanced economy.
  - New Zealand faces less negative (or potentially positive) growth spillovers because its value-added exports to China are more consumption-oriented.
  - Asian machinery exporters (e.g., Taiwan Province of China and Korea) and less-diversified commodity exporters could face significantly larger negative growth spillovers.

### Historical counterfactual: rebalancing between 2001–07 and 2011–15
- Historical changes:
  - China’s GDP growth rate declined by 3 percentage points between 2001–07 and 2011–15.
  - Actual changes in consumption and investment growth between these periods:
    - Consumption growth rate rose by 0.1 percentage point.
    - Investment growth rate fell by 5.5 percentage points.
  - Counterfactual non-rebalancing: both consumption and investment growth rates declined by the same 3 percentage points.
  - Implied rebalancing effects (deviation from counterfactual):
    - Consumption rebalancing effect: 3.1 percentage points (0.1 - (-3))
    - Investment rebalancing effect: -2.5 percentage points (-5.5 - (-3))
- Combined effect using estimated spillovers (Table 4):
  - The rebalancing between 2001–07 and 2011–15 would have led to GDP growth declines of:
    - 0.06 percentage point for the world
    - 0.12 percentage point for Asia
  - Context: the 3-percentage-point decline in China’s growth would have resulted in a 1-percentage-point decline in Asia’s growth using IMF (2014) spillover estimates; thus rebalancing accounted for about 12 percent of overall spillovers from China’s growth slowdown on Asia’s growth over the same period.
  - Cross-country: larger negative historical effects among Asian economies exposed to China’s investment demand (e.g., Korea and Taiwan Province of China); New Zealand experienced a positive historical effect due to higher exposure to China’s consumption demand.

### 3. Medium-Term Growth Projections (key projections and magnitudes)
- Short-term vs medium-term:
  - Short term: rebalancing generates immediate negative spillovers for most partner countries due to reduction in Chinese investment growth relative to no-reform scenario.
  - Medium term: as reforms yield productivity gains and China’s growth becomes more sustainable, net effect reverses to positive across partners.
- Estimated magnitudes:
  - 2018:
    - Overall negative spillover for the average country in the world ≈ 0.17 percentage point (negative).
    - Average Asian country negative impact ≈ 0.21 percentage point (negative).
  - 2019:
    - Average economy in the world projected to gain positive spillovers of 0.12 percentage point.
    - Average Asian trade partner projected to receive positive spillovers of around 0.14 percentage point.
- Regional heterogeneity:
  - Asia experiences larger short-term losses due to higher exposure to China’s investment demand.
  - Commodity-exporting emerging markets also sustain larger near-term losses.
- Key takeaway:
  - Rebalancing away from investment toward consumption contributed substantially to slowing China’s imports over the past decade.
  - Spillovers are predominantly negative in the short term and become positive in the medium term once reforms boost China’s growth above the no-reform scenario; specific magnitudes include an estimated -0.17 percentage point world average impact in 2018, shifting to +0.12 percentage point in 2019, with Asia moving from nearly -0.21 percentage point in 2018 to around +0.14 percentage point in 2019.

*Source: _wp16105 - IMF staff chapter content provided in the input.*

### 1. Spillover Results: Unitary Rebalancing ____________________________27

### 1. Spillover Results: Unitary Rebalancing

### Major findings on China and the 2015 global trade slowdown
- Global trade growth slowed in recent years both relative to income growth and relative to its past growth (Constantinescu and others 2015).
- The slowing accelerated in early 2015, particularly in China and neighboring Asian countries.
- China’s contribution to the global trade slowdown was unusually large in 2015, in contrast to 2008–09 when all regions contributed to the trade slowdown.
- In 2015, China made a big negative contribution to global goods import volume growth, while both the United States and euro area made sizable positive contributions to global import volume growth.
- On the export side in 2015, China and Asia made by far the largest negative contribution to the slowdown in global export growth.
- China’s prominence in recent trade slowdowns reflects both its rising weight in world trade and its role as a hub in global value chains (GVCs).

### Evidence on China’s rising role in global trade and GVCs
- World’s exports with China as the final destination (value-added terms) increased from 1 percent of total exports to 7 percent in 2011.
- For Asian countries excluding China, the share of exports with China as the final destination was 16 percent in 2011—equal to the United States.
- Since 2005, China’s forward linkages and backward linkages in GVCs have increased:
  - In several key GVCs, Chinese domestic value added now amounts to 5–12 percent of the world total, whereas the median country contributes less than 1 percent of the world total.
  - China’s backward linkages now range between 15–40 percent of the global share in about 10 large GVCs.
  - The import content China receives related to electronics for re-exporting now amounts to almost 40 percent of the total in world’s electronics GVC trade, compared to 0.3 percent backward linkages of the median economy in the electronics GVC based on a sample of 62 countries.

### Drivers of China’s weak import growth
- The surprising weakness of China’s import growth relative to its GDP growth is documented.
- Slowing growth of investment and exports was the key driver of China’s import weakness; the slowdown in aggregate GDP growth alone did not explain it well.
- Viewed over the past decade, about a half of China’s import growth slowdown could be attributed to rebalancing of demand composition away from investment and exports toward consumption.
- Structural changes in China’s import demand composition that affect global trade include external rebalancing (from export-driven to domestic demand driven-growth), internal rebalancing (from investment-based to consumption-oriented growth), and on-shoring (substituting imported goods by domestically-produced goods).

### Spillover effects from China’s rebalancing (consumption vs. investment)
- Spillovers from the rebalancing of China’s demand are mostly negative in the short term, while turning positive—or at least less negative—over the medium term as rebalancing leads to higher and more sustainable growth.
- The rebalancing represents a shift away from an excessively high level of investment to a more consumption-led economy, which eventually produces a positive growth dividend for China.
- Asia is estimated to sustain a larger loss than other regions from China’s rebalancing, and commodity-exporting emerging markets will also be adversely affected.
- Some countries may reap immediate gains owing to high exposure to China’s consumption demand, but most countries will suffer initially because their exports to China are more geared to China’s investment demand.
- China transmitted a negative global demand shock as a hub in the GVC, reducing its own exports and, in turn, lowering its imports and regional trading partners’ exports to China and to other destinations.

### Implications for trading partners and policy discussion
- China made a large numerical contribution to the global trade slowdown in 2015, but this was not necessarily due to a collapse of China’s overall growth; compositional demand shifts and GVC transmission played major roles.
- China’s trading partners face several challenging years in their trade with China while China undergoes reform and restructuring (IMF 2015).
- Understanding exposure to China requires accounting for the composition of China’s aggregate demand (consumption vs. investment) and using value-added trade data to capture direct and indirect trade linkages.

*Source: _wp16105 - 1. Spillover Results: Unitary Rebalancing — IMF staff chapter content provided in the input.*

### Box 2. Can China Explain Asia’s Export Slowdown?

### Box 2. Can China Explain Asia’s Export Slowdown?

### Key findings on Asia’s export slowdown
- Export growth in Asia slowed markedly in 2015 and Asia (excluding China) is identified as the largest contributor to the slowdown in global export growth over 2014–15.
- Export growth in the region dropped to an average growth rate of 4 percent from 2012 to 2014, after averaging 11 percent during the decade before the global financial crisis.
- Correlation between export growth and trade-partner GDP growth declined over the 2012–15 period for many Asian countries.
- The decline in the trade-income correlation was larger for countries with tighter GVC links with China.
- The decline in trade-income correlations since 2012 is evident from rolling-window (16-quarter) correlations computed after netting out the role of real effective exchange rates by regressing export growth and trade-partner GDP on real effective exchange rates.

### Evidence on trade-income correlations and GVC links
- Time-varying correlations: rolling-window (16-quarter) correlations show a steep decline in export–trade-partner GDP correlations for most countries since 2012 (Figure 5).
- Cross-country relationship: the bottom-right scatter plot in Figure 5 shows a negative correlation between the degree of GVC integration with China and the decline in the trade-income correlation in the last four years for selected Asian countries.
- Regression reported on the scatter: y = -0.0381x -0.2164; R² = 0.3654.
- These patterns are little affected when introducing a dummy variable for GFC periods.

### Proposed channels linking China to the region’s weakened export sensitivity
- China as a source and transmitter of shocks:
  - Global Demand: Weak demand in China’s export destinations reduces China’s exports and imports of inputs, reflecting China’s key downstream role in GVCs.
  - Demand in China: China’s domestic activity has moderated; GDP growth slowed from double digits before the GFC to 6.9 percent in 2015, which would lower China’s import demand.
- Composition channels:
  - Rebalancing: A shift in China away from exports toward domestic demand, and within domestic demand from investment to consumption (a less import-intensive sector), lowers import growth even without a change in overall economic activity.
    - Since the late 1990s, the share of consumption in GDP (in nominal terms) has risen slightly, by 1½ percentage points.
    - In real terms, investment growth has halved since 2011.
  - On-shoring: Technological upgrading and import substitution increase the share of domestically produced capital and intermediate goods, lowering import demand. Evidence: the ratio of processing imports to total exports shows a declining trend over the past decade, with the decline accelerating in 2015 (Figure 6).
- Exchange rate channel:
  - The RMB real effective exchange rate has been on an appreciating trend since the 2005 reform. Theoretical effect would be to boost imports, but empirical studies find limited impact of REER on China’s imports.
  - The analysis in this box finds no statistically significant role for appreciation of China’s REER over the past several years in its import growth slowdown.

### Interpretation for Asia’s export slowdown
- Asia’s weaker export sensitivity to partner income can be partly explained by China-related channels:
  - GVC linkages with China mean that changes in China’s import composition (rebalancing toward consumption and on-shoring/import substitution) reduce demand for imports from Asian trading partners, lowering the exports–income correlation for those partners.
  - This mechanism helps explain the large negative contribution of non-China Asia to the 2015 slowdown in global export volume growth, despite a smaller contribution to the slowdown in global import volume growth.

*Source: IMF staff estimates (Box 2, _wp16105).*

### Box 3. Footprints of China’s Rebalancing in Global Trade

### Box 3. Footprints of China’s Rebalancing in Global Trade

### Signs of Rebalancing in Trade
- Trade data show signs of rebalancing from investment toward consumption, although consumption imports are still a small share of China’s total imports.
- The average growth rate of China’s consumption imports has been increasing much faster than the world average, while China’s capital goods imports growth contracted sharply against the slightly positive growth rate of the world average.
- Slowdown in China’s imports since the last quarter in 2014 has been driven by a sharp contraction in goods imports, while service imports have been going strong; strong service imports are suggestive of strong domestic demand consistent with rebalancing.

### Empirical Strategy and Import-Adjusted Demand (IAD)
- Two-step empirical strategy:
  - Construct import-adjusted demand (IAD) as a better measure of effective demand for imports, following Bussière and others (2013).
  - Estimate import regressions using IAD, GDP, and domestic demand as alternative demand measures; use robust standard errors.
- IAD definition uses import intensities of C(private consumption), G(public consumption), I(investment), and X(exports), with import intensities normalized to sum to one in each period.
- Rationale: investment and exports are generally more import-intensive than consumption; adjusting by import-intensity better captures effective demand for imports and explains why trade can contract more severely than GDP during crises.

### Import Intensity Findings
- Import intensities (China, updated to 2011) show investment and exports are more import-intensive than consumption (private and public).
- Intensities peaked in 2005, with a downward trend thereafter and a short-lived recovery in 2010—partly reflecting on-shoring (substituting domestic inputs for imported intermediate goods).
- This pattern is consistent with prior studies (Koopman, Wang, and Wei (2012); Kee and Tang (2015)).

### Fit of IAD and Elasticities
- Among demand measures, IAD generally explains trade flows best; income elasticity estimated around 1.5 to 2 depending on model specification and sample periods.
- IAD-based fitted values track the 2009 trade collapse well but explain only part of the 2015 trade contraction; reasons include input-output table availability only up to 2011 (import intensities held constant after 2011) and other non-income factors influencing trade.
- For robustness, models estimated using goods trade only (to focus on the 2015 “trade collapse”) and goods-and-services; estimations via OLS and dynamic OLS produce broadly consistent results.

### Regression Results (Selected)
- Table 1 (Imports of Goods, yoy growth, national accounts) — selected coefficients (robust t-statistics in parentheses):
  - Model using IAD: IAD coefficient 1.924*** (9.508); Onshoring 0.559*** (7.761); GFC dummy -0.054** (-2.526); R-squared 0.927; Observations 385.
  - Comparable GDP model: GDP coefficient 2.147*** (5.102); Onshoring 0.526*** (5.518); R-squared 0.851; Observations 338.
  - Models report REER coefficients varying in sign and significance across specifications (e.g., REER -0.795*** (-3.005) in one specification).
- Table 2 (Imports of Goods and Services) — selected coefficients:
  - IAD coefficient 1.715*** (10.133); Onshoring 0.411*** (7.404); GFC dummy -0.079*** (-5.381); R-squared 0.938; Observations 385.
- Comment on REER: For period after 2005 exchange rate reform, REER statistically insignificant across many specs; price elasticity generally bears a negative sign in most specifications, with ambiguous impacts discussed in literature.

### Decomposition of Import Slowdown (2006–10 vs 2011–15)
- Average goods import growth during 2011–2015 declined by 6.8 percentage points compared to 2006–2010.
- IAD predicts a decline of 7.2 percentage points (thus more than fully explaining the observed -6.8).
- Decomposition (2012–2015 over 2006–2011, in percentage points) — Table 3:
  - Imports: -6.8
  - IAD: -7.2
    - Domestic Demand: -5.8
      - Consumption: -0.7
      - Government: -1.2
      - Investment: -3.9
    - External Demand: -1.5
  - Onshoring: 0.5
  - Residual: -0.1
  - Net effect: -3.6
- Counterfactual (no-rebalancing) column shows consumption would make a bigger negative contribution while investment and exports make less negative contributions; the difference (effect of rebalancing) implies consumption makes a positive contribution and investment and exports make negative contributions.
- Conclusion: Rebalancing accounts for about half of the actual import slowdown over the period.

### On-Shoring Proxy and Caveats
- On-shoring proxied by processing imports as a share of exports (reflects GVC-related structural changes); proxy contributed 0.5 percent to decomposition as pace of on-shoring slowed over recent years except in 2015.
- Caveats: input-output tables available only up to 2011; proxy measures may have endogeneity issues; alternative measures (foreign value added share from TiVA) show similar patterns during overlapping periods but shorter sample.

### Rebalancing Scenarios and Medium-Term Simulation
- Unit rebalancing defined as a shift of growth from investment to consumption: consumption growth rate increases by 1 percentage point while investment growth rate declines by 1 percentage point (growth-neutral given similar GDP shares).
- Baseline (reform-and-rebalancing) scenario vs counterfactual (no reform):
  - Near term: overall growth lower in rebalancing scenario compared to counterfactual.
  - Medium term: rebalancing yields higher and sustainable growth; positive gains materialize starting in 2019.
  - Composition shift from investment to consumption begins in near term; the (negative) difference between counterfactual and baseline is larger for investment than consumption until 2017.

### Trade Exposure to China (Value-Added, TiVA)
- Using OECD-WTO TiVA data (62 countries, 1995–2011), measure domestic value-added embodied in China’s final demand (consumption and investment) as percent of each country’s GDP.
- Regional patterns (2011):
  - Asian countries have higher exposure to China’s final demand than non-Asian countries.
  - Asia’s exposure to China’s investment is about 1.8 times its exposure to China’s consumption.
  - Non-Asia’s exposure to China’s investment is about 1.5 times its exposure to China’s consumption.
- Country variation:
  - Example: Taiwan Province of China shows substantial exposure to China’s investment; New Zealand has expanded roles of consumption goods and services exports to China — implying New Zealand better positioned to absorb rebalancing than Taiwan Province of China.

### Spillover Methodology and Sensitivity
- Baseline country-specific OLS regression (annual sample 1995–2011) estimates elasticity of domestic value-added exports (as share of country GDP) with respect to China’s consumption or investment (both in logs).
- Sensitivity measure (beta) interpreted as elasticity of a country’s domestic value-added exports to a 1 percent change in China’s consumption (or investment).
- Using estimated sensitivities and projected differences between rebalancing and no-rebalancing scenarios for China’s consumption and investment growth, compute net change in each country’s exports to China (in value-added terms).
- Sign rule:
  - If net change > 0 (weighted sensitivities and changes), the country gains from rebalancing; if net change < 0, the country loses from rebalancing.

*Source: IMF staff estimates (Box 3, _wp16105).*

### 1. Spillover Results: Unitary Rebalancing

### 1. Spillover Results: Unitary Rebalancing

### Definition and experiment design
- Unitary rebalancing is defined as a shift of growth from investment to consumption when the consumption growth difference is normalized to be 1 percentage point, i.e. +1 percentage point in consumption growth, and the investment growth difference to be -1 percentage point, i.e. -1 percentage point in investment growth.

### Impact on value-added exports to China (first-round effects)
- Average regional impacts (unitary rebalancing: China consumption +1 percentage point and investment -1 percentage point):
  - Asia and commodity exporters are most negatively impacted compared with other regions and groups.
- Country-level heterogeneity in Asia:
  - Economies closely integrated to China through global value chains and exposed heavily to China’s investment demand (examples in the text: Taiwan Province of China and Korea) are most adversely affected.
  - New Zealand benefits because it exports mainly consumption-related products to China.
- Cross-sample finding:
  - Spillover effects hinge on a partner country’s export profile to China; countries more exposed to China’s investment demand lose more from the unitary rebalancing.

### Medium-term projection context (summary of related results)
- Using 2016 growth projections (Figure 12 referenced in source):
  - Exports reaching China’s final demand in value-added terms will decline in 2016 because projected consumption and investment growth are lower than the counterfactual in 2016.
- Projected dynamics through 2018–2019:
  - From 2019, positive effects on overall growth from rebalancing are expected to materialize as consumption growth picks up more than investment and both grow faster than in the no-reform scenario.
  - In 2018, most countries still lose in exports-to-GDP as overall growth under rebalancing remains lower than the counterfactual; New Zealand is an exception in 2018.
  - By 2019, as overall growth begins to benefit from rebalancing, countries begin to gain on average; Asia benefits most under this projection due to higher exposure to China’s final demand.
- Caveat:
  - Medium-term calculations are subject to large uncertainty because estimated elasticities can change and growth can take different paths.

### Estimating GDP growth spillovers (method and key econometric results)
- Two-step estimation:
  1. Estimate shocks to China’s consumption growth and investment growth via a four-variable VAR (global GDP, Chinese GDP growth, Chinese consumption growth, Chinese investment growth) over t = year.
  2. Estimate each partner country’s GDP growth response to those shocks, allowing responses to vary with bilateral trade linkages measured as domestic value added exported for Chinese final consumption, in percent of the country’s GDP. Controls include VIX and global commodity prices.
- Interaction specification:
  - Propagation incorporates interaction between the China demand shock and trade linkage (investment-related and consumption-related trade exposure).
- Panel estimation period: 1995–2014.
- Key coefficients from Table 4 (Dependent variable: GDP growth of country i):
  - Year 1 results:
    - China investment growth shock × Trade exposure: 0.019*** 
    - China investment growth shock: 0.048***
    - China consumption growth shock × Trade exposure: 0.002
    - China consumption growth shock: 0.041**
  - Year 2 results:
    - China investment growth shock × Trade exposure: 0.021***
    - China investment growth shock: 0.025**
    - China consumption growth shock × Trade exposure: 0.019*
    - China consumption growth shock: 0.021
  - Additional model details:
    - Additional controls: Trade exposure (investment related) or Trade exposure (consumption related), VIX, oil prices
    - Constant: Yes
    - Country fixed effects: Yes
    - Time fixed effects: Yes
    - Observations: 1,140 and 1,140 (for the two specifications)
    - R-squared: 0.267 and 0.224
  - Statistical notes:
    - Interaction term between investment growth shock and trade linkages is statistically significant at 1 percent.
    - While the consumption interaction alone is not significant, the consumption interaction and consumption growth shock variables are jointly significant at 1 percent (F statistic=8.77).

### GDP growth exposure to a unitary rebalancing (aggregate and distributional findings)
- Using estimated coefficients and historical value-added trade data (trade linkages fixed at latest available historical data, i.e. 2011):
  - A +1 percentage point shock to China’s consumption growth and a -1 percentage point shock to China’s investment growth yields an overall negative impact on GDP growth of the average economy in the sample.
  - Countries more exposed to China’s investment demand are affected more adversely, despite the positive consumption shock.
  - The average Asian economy will experience a larger decline in growth given its heavy reliance of value-added exports on China’s fixed investment, compared to the average non-Asian economy.
  - The adverse growth impact on the average commodity exporting emerging economy from +/- 1 percent changes in China’s consumption/investment growth is higher than on other emerging economies or the average advanced economy.
- Country heterogeneity:
  - New Zealand faces less negative (or potentially positive) growth spillovers because its value-added exports to China are more consumption-oriented.
  - Asian economies exporting investment-related goods/services (e.g., machinery exporters such as Taiwan Province of China and Korea) and less-diversified commodity exporters could face significantly larger negative growth spillovers.

### Historical counterfactual: role of rebalancing between 2001–07 and 2011–15
- Historical changes between the two periods:
  - China’s GDP growth rate declined by 3 percentage points between 2001–07 and 2011–15.
  - Actual changes in consumption and investment growth between these periods:
    - Consumption growth rate rose by 0.1 percentage point.
    - Investment growth rate fell by 5.5 percentage points.
  - Counterfactual non-rebalancing scenario assumption: both consumption and investment growth rates declined by the same 3 percentage points.
  - Implied rebalancing effects (deviations from counterfactual):
    - Consumption rebalancing effect: 3.1 percentage points (0.1 - (-3))
    - Investment rebalancing effect: -2.5 percentage points (-5.5 - (-3))
- Combined effect on GDP growth using estimated spillovers (Table 4 results):
  - The rebalancing between 2001–07 and 2011–15 would have led to GDP growth declines of:
    - 0.06 percentage point for the world
    - 0.12 percentage point for Asia
  - Contextual comparison:
    - The 3-percentage-point decline in China’s growth between the two periods would have resulted in a 1-percentage-point decline in Asia’s growth using IMF (2014) spillover estimates.
    - Thus, the rebalancing effect accounted for about 12 percent of overall spillovers from China’s growth slowdown on Asia’s growth over the same period.
- Cross-country historical effects:
  - Larger negative historical effects among Asian economies exposed to China’s investment demand (e.g., Korea and Taiwan Province of China).
  - New Zealand experienced a positive effect historically due to higher exposure to China’s consumption demand and the relative rise in China’s consumption growth.

*Source: IMF staff estimates and calculations as presented in the source content.*

### 3. Medium-Term Growth Projections

### 3. Medium-Term Growth Projections

### Estimated global and regional GDP spillovers from Chinese rebalancing
- In 2018, negative growth spillovers dominate because the investment growth differential between the reform and no-reform scenarios remains negative.
- The overall negative spillover in 2018 is estimated to reach about 0.17 percentage point for the average country in the world.
- The negative impact in 2018 is larger for the average Asian country, reaching nearly 0.21 percentage point, reflecting Asia’s large exposure to China’s investment.
- In subsequent years, productivity gains and more sustainable Chinese growth lead consumption and investment growth differentials between reform and no-reform scenarios to turn positive.
- After 2018, all partner economies could receive positive GDP growth spillovers as China’s growth becomes more sustainable.
- In 2019:
  - The average economy in the world is projected to gain positive growth spillovers of 0.12 percentage point.
  - The average Asian trade partner is projected to receive positive spillovers of around 0.14 percentage point, due to Asia’s high exposure to China’s investment demand.

### Short-term versus medium-term dynamics
- Short term:
  - Rebalancing (shift from investment toward consumption) generates immediate negative spillovers for most partner countries, driven primarily by a reduction in Chinese investment growth relative to a no-reform scenario.
- Medium term:
  - As reforms realize productivity gains and China’s growth path becomes more sustainable, the net effect reverses to positive spillovers across partner economies.

### Regional heterogeneity and exposure
- Asia experiences larger short-term losses relative to the world average because of higher exposure to China’s investment demand.
- Commodity-exporting emerging markets also sustain larger losses from China’s rebalancing in the near term.

### Empirical and illustrative evidence (as presented in figures)
- Figures referenced in the source document illustrate:
  - Average impacts on partner-country GDP growth from unitary rebalancing shocks (Figures 20–23).
  - Country-level impacts for Asian partners (Figures 21 and country-by-country panels).
  - Projected regional impacts of the projected rebalancing (Figure 24).
  - Different measures of shocks to consumption and investment and transmission through trade channels (Figures 22 and 25).

### Key takeaway
- Rebalancing China’s demand composition away from investment toward consumption contributed substantially to the slowing of China’s imports over the past decade.
- Spillover effects from this rebalancing are predominantly negative in the short term and become positive in the medium term once reforms boost China’s growth above the no-reform scenario; magnitudes include an estimated -0.17 percentage point world average impact in 2018, shifting to +0.12 percentage point in 2019, with Asia moving from nearly -0.21 percentage point in 2018 to around +0.14 percentage point in 2019.

*Source: IMF staff estimates as presented in "3. Medium-Term Growth Projections" from the source document.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp16105.pdf_