Business cycle co-movements and transmission channels: evidence from China

Abstract

This article examines the impacts of international trade, foreign direct investment (FDI) and industrial structure on international business cycle co-movements between China and its major trading partners. We investigate the principal transmission factors of business cycle co-movements and their contributions to China’s economic growth in the context of economic globalization. Through studying the 27 major trading partners during 1990–2015, we find that, from China’s perspective, the synchronization tendency was continuously growing before the 2008 financial crisis but slowed down or even reversed after the crisis. Bilateral trade intensity and FDI intensity contributed more to cyclical co-movement behaviors between China and its emerging market partners, but less to economic synchronization between China and its advanced economic partners. Industrial structure similarity, on the contrary, could explain the co-movement behaviors between China and its advanced economic partners, but not emerging market partners. China’s past economic growth was also significantly correlated with the economic performance of its non-Asian trading partners, but not Asian neighbors.

Keywords:

• Business cycle comovements
• Chinese economy
• foreign direct investment (FDI)
• industrial structure
• international trade

JEL codes:

• E32
• F21
• F41
• F43

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Prof. Huifang Cheng is a professor at Zhejiang University of Technology. Her research interests include international trade, international finance and foreign direct investment.

Dr. Lijun Cen is a research associate at Global Institute for Zhejiang Merchants Development, Zhejiang University of Technology. Her research interests include international trade and foreign direct investment.

Mr. Yu Wang is a PhD candidate at Chinese University of Hong Kong. His research interests include comparative development and macroeconomics.

Prof. Hongyi Li is an associate professor at Chinese University of Hong Kong. His research interests are applied econometrics and macroeconomics. He has published in international journals like Journal of Econometrics and Economic Journal.

Notes

1 We thank one reviewer to point out that mutual FDI as a mechanism of synchronization of business cycle should be less important than the flows of portfolio, especially short-term capital, because the FDI are less mobile. However, we cannot do the analysis of short-term capital flow or external debt between China and other countries for three reasons: first, to our knowledge, bilateral external debt data and short-term capital flow data of China are not available. Only aggregate data between China and all the other countries are available; second, most countries not only have country-to-country bilateral debt, but also have borrowings from international organizations like the World Bank and International Monetary Fund. Therefore, even if bilateral debt (or short-term capital flow) data are available, it may not fully reflect the bilateral capital flow and openness level between China and the other countries; third, previous economic growth literature often used a country’s FDI as its capital flow and openness measure; while external debt was found to be more relevant to financial stability and financial development of a country. FDI and international trade are also often used to measure a country’s openness and connection with other countries. As our study focus on between-country GDP correlation and we use it as the dependent variable, FDI should also be an appropriate proxy in our case.

2 The advanced economies include the US, Hong Kong, Japan, Korea, Germany, the Netherlands, the UK, Singapore, Italy, France, Canada, Australia, Spain, Finland and Sweden; the emerging markets include India, Malaysia, the United Arab Emirates, Indonesia, Thailand, Vietnam, Mexico, Brazil, Saudi Arabia, the Philippines, South Africa and Iran.

3 We thank the reviewer for pointing out this.

4 In the working paper version, we had another subsection to analyze and discuss whether the domestic factors like labor and domestic investment are more important for China’s growth than international ones. The preliminary results suggested that domestic factors are more important, but these results were non-robust and might result from the non-stationarity of some variables like GDP. Some important control variables might also be omitted from the regression. Therefore, we finally removed this subsection from the revised manuscript. Further study could explore the different roles of domestic and international factors in China’s growth miracle.

Additional information

Funding

The work described in this paper was supported by a grant from the Department of Decision Sciences and Managerial Economics, CUHK Business School, the Chinese University of Hong Kong. Partial financial support from Project “Research of the Chinese industrial and trade policy coordination and implementation in the new era” (18ZDA067, National Social Science Foundation of China) and Project “Export specialization, product quality upgrading and economic growth” (71803179, National Natural Science Foundation of China) are also greatly acknowledged.