LSE’s Keyu Jin on the Rise of China – IMF F&D
Source details
- Canonical URL
- LSE’s Keyu Jin on the Rise of China – IMF F&D
Other formats
Bibliographic details
- Authors: KEYU JIN
- Published: June 1, 2019
Core argument
- As China transforms from an economic backwater to the most connected hub in the global economy, it is driving seismic changes within its own borders and beyond.
- Contemporary thinking on the future of the international financial order does not yet focus on the new paradigm created by China—but it should.
- 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.
- Despite that, 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.
Financial integration, volatility, and channels of spillover
- China becoming the first systemic emerging market economy implies greater volatility and uncertainty as it becomes more intermeshed with global financial markets.
- Every significant policy move, stock market panic, and cyclical upswing or downswing in China can plausibly diffuse and propagate through the web of financial networks that links nations.
- Current structural features that amplify volatility:
- 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 opens more channels (cross-border bank lending, portfolio holdings, capital flows, a more dominant renminbi), shocks emanating from China would:
- Propagate more swiftly and potently.
- Be amplified and expanded through its increasing and diverse financial channels.
Evidence on policy uncertainty and global effects
- Research with Yi Huang shows that it is not only policy shocks (monetary and fiscal) that spill over to the rest of the world but also shocks of policy uncertainty.
- In a country where reforms happen regularly and where policy direction is based on experimentation rather than experience, uncertainty can be a first-order menace to overly sensitized financial markets.
- Empirical results cited:
- During 2000–18, Chinese policy uncertainty shocks significantly affected world industrial production, commodity prices, global stock prices and bond yields, the MSCI World Index, and financial volatility.
Historical analogy
- The rise of China bears much similarity to the ascent of the United States in the late 19th century:
- Rapid growth accompanied by unsophisticated capital markets, corporate governance problems, recurrent banking crises, weak financial intermediaries, shortage of financial assets, and absence of a lender of last resort.
- The vagaries of the US economy then transmitted fully to Europe and Great Britain; by analogy, future Chinese shocks could transmit widely.
Three key questions for the future
- The desirability of China’s rapid financial liberalization and opening up:
- From China’s perspective, financial liberalization and integration may lead to better allocation of financial capital and constrain policy by exposing it to global investor scrutiny.
- What the world wants and to what extent it should express preferences:
- Tension exists between domestic policies and international imperatives; the Federal Reserve bases policy on US interests though those policies substantially affect the rest of the world. Is it realistic to ask China to base financial policies on the world’s interests rather than its own?
- The need for international cooperation:
- If the Federal Reserve and the People’s Bank of China embrace different and potentially conflicting views, cooperation—which featured in Bretton Woods, early flexible exchange rate regimes, the Group of Seven, and the 1985 Plaza Accord—needs to return.
Potential positive roles for China
- China as a global anchor:
- China will be an anchor for demand in the world, particularly as aggregate demand deficits in advanced economies may be a perennial affliction.
- China as a source of diversification:
- China can serve as an additional source of diversification for global portfolios and currencies; the renminbi could even be an alternative reserve currency.
Source: LSE’s Keyu Jin, “China’s Ascent,” F&D Magazine, June 2019 (IMF F&D page overview).
Content in this bundle
- صعود الصين
- China’s Ascent - June 2019 | FINANCE & DEVELOPMENT | International Monetary Fund
- Возвышение Китая – Финансы и развитие – июнь 2019 года