China’s gradual slowdown and rebalancing and its rising influence on regional markets, while expected to bring long-term benefits, are likely to remain headwinds for Asian economies in the short term. Economies most adversely affected by trade spillovers are those that have been closely integrated with China through the global value chain, such as Korea, Malaysia, and Taiwan Province of China, as these economies are heavily exposed to China’s investment activity. In contrast, New Zealand will be least negatively affected, as its exports to China will benefit from the increase in China’s consumption demand.
Figure 2.12. Regional Equity and Foreign Exchange Markets During China-Related Shocks
–2.5
Sources: Bloomberg, L.P.; and IMF staff calculations.
1Countries with strong trade links to China are shown in Figure 2.3.
1. Exchange Rate Movements on August 11, 2015
(Percent change; negative=depreciation) 2. Stock Market Movements on January 4, 2016 (Percent change)
3. Exchange Rate Movements since August 11, 2015 (t = 1)1 (Percent change; negative=depreciation)
4. Stock Market Movements since January 4, 2016 (t = 1)1 (Percent change)
Strong trade links to China Moderate trade links to China Strong trade links to China
Moderate trade links to China
–1.0
Hong Kong SARPhilippinesIndonesiaThailandJapanIndia Taiwan Province of ChinaNew ZealandSingaporeMalaysiaAustraliaKoreaChina
–7 –6 –5 –4 –3 –2 –1 0 Taiwan Province of China Japan
China
Sources: Bloomberg, L.P.; and IMF staff calculations.
Note: Based on 30 episodes during which China experienced outsized stock market movements unrelated to global events. During these episodes, the average daily change in the Chinese stock market was 6.8 percent, 6.2 percent, and 6.4 percent, respectively, for each time period. Pre-GFC = January 2001–December 2007;
Post-GFC = January 2010–June 2015; Since June 2015 = July 2015–January 2016.
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4
Pre-GFC Post-GFC Since June 2015
Asia equity movement Daily standard deviation
Figure 2.13. Event Study: Stock Market Movements Due to Shocks from China
(Percent change)
Sources: Bloomberg, L.P.; and IMF staff calculations.
Note: Based on 30 episodes during which China experienced outsized stock market movements unrelated to global events. During these episodes, the average daily change in the Chinese stock market was 6.8 percent, 6.2 percent, and 6.4 percent, respectively, for each time period. Pre-GFC = January 2001–December 2007;
Post-GFC = January 2010–June 2015; Since June 2015 = July 2015–January 2016.
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4
Pre-GFC Post-GFC Since June 2015
Moderate trade links Strong trade links
Figure 2.14. Event Study: Stock Market Movements Due to Shocks from China, by Trade Links with China
(Percent change)
Sources: Bloomberg, L.P.; and IMF staff calculations.
Note: Based on 14 episodes of outsized changes of the onshore renminbi-dollar exchange rate. During these episodes, the average daily change in the renminbi- dollar exchange rate was 0.85 percent and 0.86 percent, respectively, for each time period. Before June 2015 = July 2005–December 2007 and January 2010–June 2015; Since June 2015 = July 2015–January 2016. FX = foreign exchange.
0.0 0.1 0.2 0.3 0.4 0.5
Before June 2015 Since June 2015
Asia FX movement Daily standard deviation
Figure 2.15. Event Study: Exchange Rate Movements Due to Shocks from China
(Percent change)
Sources: Bloomberg, L.P.; and IMF staff calculations.
Note: Based on 14 episodes of outsized changes of the onshore renminbi-dollar exchange rate. During these episodes, the average daily change in the renminbi- dollar exchange rate was 0.85 percent and 0.86 percent, respectively, for each time period. Before June 2015 = July 2005–December 2007 and January 2010–June 2015; Since June 2015 = July 2015–January 2016.
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
Before June 2015 Since June 2015
Moderate trade links Strong trade links
Figure 2.16. Event Study: Exchange Rate Movements Due to Shocks from China, by Trade Links with China
(Percent change)
2. NAvIGATING ThE TRANsITION: TRAdE ANd fINANCIAL sPILLOvERs fROM ChINA
0.00 0.05 0.10 0.15 0.20 0.25 0.30
China United States Japan Euro area
Sources: IMF staff estimates.
Note: Average sensitivity for Asian countries defined in Annex 2.4. GFC = global financial crisis; Pre-GFC = 2000–07; Post-GFC = 2010–14.
Figure 2.17. Equity Market Spillover
Pre-GFC Post-GFC
–0.10 –0.05 0.00 0.05 0.10 0.15 0.20
Dec. 2001 Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14
1. Asian Market Sensitivity to Systemic Economies
(Forbes-Chinn beta coefficient) 2. Asian Market Sensitivity to China
(Forbes-Chinn beta coefficient, 12-month rolling window)
–1.5 –1.0 –0.5 0.0 0.5 1.0 1.5 2.0
Linkages with China Linkages with Japan Trade exposure Trade competition Financial linkages
Figure 2.18. Determinants of Market Sensitivity to China and Japan
(Coefficient)
Source: IMF staff estimates.
Note: Average sensitivity for Asian countries defined in Annex 2.4. The shaded bars denote variables that are statistically significant.
Source: IMF staff estimates.
Note: Average sensitivity for Asian countries defined in Annex 2.4. GFC = global financial crisis; Pre-GFC = 2001–07; Post-GFC = 2010–14. The decomposition follows the commonality coefficients approach described in Nathans, Oswald, and Nimon (2012).
0 20 40 60 80 100
Pre-GFC Post-GFC
Trade exposure Trade competition Financial linkages
Figure 2.19. Contribution to Explained Variance in Market Sensitivities to China
(Percent)
Economies most sensitive to further volatility in Chinese markets are those with strong trade links with China (ASEAN-5, Korea, and Taiwan Province of China), as well as Hong Kong SAR owing to strong financial linkages with China.
Furthermore, China-related shocks, to the extent they lead to “risk-off ” episodes, can also affect Japan through safe haven flows. Indian markets, on the other hand, are better placed to weather China-related shocks, given the relatively limited trade and financial links with China.
The high vulnerability reflects the region’s large exposure to China, especially to its final investment demand. It also reflects the fact that China’s impact on regional markets is likely to grow further with the ongoing process of internationalization of the renminbi, the country’s gradual capital account opening, and further regional trade integration. For China, clarity and communication on policies will be essential in managing the transition to a model increasingly driven by consumption and services. It will also help moderate the perceived uncertainty for neighboring countries, especially when combined with clarity on the exchange rate regime and consistency in its implementation.
For other countries to mitigate these risks and build resilience, they should adopt measures in
Country “i”
Trade linkages Financial linkages Confidence channel
VIX CHN
JPN EA
USA
Source: IMF staff illustration.
Note: CHN = China, EA = euro area, JPN = Japan, USA = United States. VIX = Chicago Board Options Exchange Volatility Index. Country “i” stands for either Australia, India, Indonesia, Korea, Malaysia, New Zealand, the Philippines, Taiwan Province of China, or Thailand.
Figure 2.20. Scenario Analysis: Transmission of Shocks
0 10 20 30 40 50 60
Jan. 2015 Apr. 15 July 15 Oct. 15 Jan. 16
China introduces new exchange rate mechanism ahead of potential Federal Reserve rate hike
Figure 2.21. Asian Market Sensitivity to China under Different Scenarios
VIX index China VIX index
0.00 0.05 0.10 0.15 0.20 0.25 0.30
Baseline estimate Adjusted estimate with VIX shock Federal Reserve
tightening coupled with commodity price slump and China concerns
Impact without a VIX shock Additional impact from a VIX shock 2. Asian Market Sensitivity to China
(Beta coefficient)2 1. Market Volatility1
Sources: Bloomberg, L.P.; and IMF staff estimates.
Note: VIX = Chicago Board Options Exchange Volatility Index.
1The shaded bars represent global risk aversion episodes as defined by De Bock and de Carvalho Filho (2015) based on the daily high of the VIX.
2Average sensitivity for Asian countries defined in Annex 2.4. Post-GFC sample is shown. GFC = global financial crisis.
2. NAvIGATING ThE TRANsITION: TRAdE ANd fINANCIAL sPILLOvERs fROM ChINA
both the short and long term along the following general principles, while considering individual circumstances as discussed in Chapter 1.