Abstract
The Chinese authorities welcomed the spillover analysis, noting that their policies have important global spillover effects. The note also discusses China’s evolving role in global trade, impact of rebalancing on the supply chain, estimating China’s spillovers, elasticities approach, factor pricing, overcapacity, and sustainability risks. It elaborates on the impact of competition from Brazil and Mexico, China’s closed capital account and capital flows to emerging markets, the impact of China’s saving on global financial conditions, and potential impact on global bond markets of reallocating reserves.
II. CHINA SPILLOVERS: IMPACT OF REBALANCING ON THE SUPPLY CHAIN1
This chapter assesses quantitatively the short-run effect of rebalancing growth in China on its trading partners. Using an input-output framework and detailed trade information, and holding short-term production patterns unchanged, it finds that rebalancing—with higher private consumption and a real appreciation of the RMB—would substantially raise GDP in the regional supply chain. The impact on advanced partners would be small initially, but should become larger as production patterns change.
1. Rebalancing policies. As discussed in Chapter I, China’s export-oriented growth strategy has had important effects on trading partners and competitors. Going forward, its policies to rebalance the economy—such as in the 12th Five Year Plan—are expected to have significant effects on the global supply chain as China’s imports rise and its production becomes more domestically oriented. These policies include re-aligning relative prices (e.g., cost of capital, land, and pollution), gradually adjusting the exchange rate, and changing the savings behavior of households and corporations (e.g., through reforms to social safety nets).
2. The exercise. This note uses an input-output framework—which takes as given the production structure of inputs and output in an economy and relates changes in final demand across countries to changes in output and value added (see Regional Economic Outlook: Asia and Pacific, IMF, April 2010)—to assess quantitatively the instantaneous or short-run effect on partner countries of a fall in savings that raises private consumption (by 5 percent of GDP) and lowers the share of investment in GDP, and a real effective exchange rate (REER) appreciation (of 10 percent). The calibration of the increase in private consumption by 5 percent follows the study of Guo and N’Diaye (2010). The REER appreciation of 10 percent is ad hoc and illustrative, and not based on any assessment of RMB undervaluation. In the near term, it is taken as part of an overall rebalancing package, which includes measures to promote private consumption.
3. Rising private consumption. Rebalancing that raises Chinese consumption would raise growth universally and reduce China’s trade surplus significantly (Figure 1):
Input-Output Analysis: Impact of Rising Consumption on Trading Partners
Citation: IMF Staff Country Reports 2011, 193; 10.5089/9781462342570.002.A003
Input-Output Analysis: Impact of Rising Consumption on Trading Partners
Citation: IMF Staff Country Reports 2011, 193; 10.5089/9781462342570.002.A003
Input-Output Analysis: Impact of Rising Consumption on Trading Partners
Citation: IMF Staff Country Reports 2011, 193; 10.5089/9781462342570.002.A003
Growth. Chinese GDP would increase by around 2 percent. Regional trading partners would be the significant beneficiaries. For instance, GDP in Malaysia and in Taiwan Province of China would rise by around ½ percent. However, advanced economies would benefit substantially less. Japan’s GDP would rise by 0.1 percent, while the U.S. and the Euro Area would see even smaller rises. (By comparison, a 5 percent increase in U.S. consumption has larger effects outside Asia than it does in Asia.)
Trade balance. China’s trade surplus would be reduced by about ½ percent of GDP. The trade balance in all trading partners would improve, contributing to raising GDP.
4. REER appreciation. An appreciation of the REER would lower China’s trade balance and also its GDP, but most trading partners would benefit (Figure 2).
Input-Output Analysis: Impact of Real RMB Appreciation
Citation: IMF Staff Country Reports 2011, 193; 10.5089/9781462342570.002.A003
Input-Output Analysis: Impact of Real RMB Appreciation
Citation: IMF Staff Country Reports 2011, 193; 10.5089/9781462342570.002.A003
Input-Output Analysis: Impact of Real RMB Appreciation
Citation: IMF Staff Country Reports 2011, 193; 10.5089/9781462342570.002.A003
China. A 10 percent REER appreciation could reduce China’s GDP by around 1 percent. The initial direct impact could be larger, close to 1¾ percent; however, the appreciation would also raise private consumption that offsets this direct impact. China’s trade surplus would narrow by more than ⅓ percent of baseline GDP.
Regional supply chain. Most trading partners would benefit from a real appreciation of the renminbi, especially regional partners. This changes if other countries in the regional supply chain also appreciate.
Commodities’ producers. Some raw material suppliers, however, could have slightly lower GDP, reflecting a decline in the demand for inputs. Nonetheless, the rise in Chinese consumption (due to the appreciation) boosts GDP in all partners.
Advanced partners. Advanced trading partners benefit only marginally from the appreciation. The largest beneficiary is the Euro Area, probably reflecting Germany’s role as a significant supplier to China.
5. Best of both worlds. Combining the 10 percent REER appreciation with rebalancing toward private consumption (rising 5 percent of GDP in total) leaves China’s GDP relatively unchanged, while China’s trade surplus narrows (Figure 3). Trading partners benefit from both the appreciation and stronger demand. The impact of the stronger consumption also tends to ameliorate the impact of trading partner appreciation.
Input-Output Analysis: Impact of Rising Consumption and Real Appreciation
Citation: IMF Staff Country Reports 2011, 193; 10.5089/9781462342570.002.A003
Input-Output Analysis: Impact of Rising Consumption and Real Appreciation
Citation: IMF Staff Country Reports 2011, 193; 10.5089/9781462342570.002.A003
Input-Output Analysis: Impact of Rising Consumption and Real Appreciation
Citation: IMF Staff Country Reports 2011, 193; 10.5089/9781462342570.002.A003
6. Caveats. The strength of input-output analysis is that it is built on detailed trade and production patterns. However, the economic structure is relatively static, with limited substitution possibilities. The simulation results should, therefore, be interpreted as short-term impacts. The scenarios may understate the impact of an appreciating renminbi, with only trade in final goods directly affected by the appreciation. Trade in intermediate goods is affected only through second round effects.
Prepared by Papa N’Diaye (APD) and Nathan Porter (SPR).
