December 9, 2024 – As global financial markets become increasingly interconnected, the impact of economic developments in one region can send ripples across the globe. In a recent study, economists Rodolfo Campos, Ana-Simona Manu, Luis Molina Sánchez, and Marta Suárez-Varela investigate the spillover effects of Chinese economic shocks on emerging market economies, highlighting the significant role that both China’s macroeconomic conditions and its monetary policy play in shaping financial landscapes worldwide.
The research, focusing on East Asia, Eastern Europe, and Latin America, identifies two main types of Chinese shocks—those stemming from monetary policy and those related to broader macroeconomic changes. Using a Bayesian vector autoregression (VAR) model and daily financial data, the study reveals that while monetary policy shocks from China have minimal effect, macroeconomic disturbances originating in China have substantial and lasting consequences for emerging markets, especially in equity prices, sovereign debt, and exchange rates.
Emerging economies, which are often more vulnerable due to less developed financial markets, are particularly sensitive to global economic shifts. The study finds that macroeconomic shocks in China directly influence stock prices in these countries, with Latin America experiencing the most significant responses. A positive macroeconomic shock in China, such as increased economic activity or growth, boosts stock prices by approximately 0.26% in Latin American markets, a notably higher impact compared to East Asia (0.15%) and Eastern Europe.
The influence of China’s macroeconomic changes on Latin American financial markets may seem surprising given East Asia’s higher industrial integration with China. However, the authors argue that Latin American economies, which are deeply tied to global commodity cycles, are more affected by Chinese macroeconomic shifts due to China’s dominant role in commodity demand. For example, firms in the Latin American commodity sector—such as mining and industrial metals—show a stronger response to these shocks than companies focused on the domestic economy, further emphasizing the role of global commodity markets in financial spillovers.
Beyond equity markets, the study also examines the broader impact on financial variables such as exchange rates and sovereign debt costs. The results show that Chinese macroeconomic shocks lead to a reduction in sovereign and corporate external debt spreads and an appreciation of local currencies in emerging markets, with the notable exception of Eastern Europe. Interestingly, the study finds that monetary policy shocks from China have little effect on these variables, underscoring the stronger influence of broader economic conditions rather than interest rate changes.
These findings carry significant implications for central banks and policymakers. The authors suggest that multi-country economic models used by central banks often underestimate the persistent and significant spillovers from China, particularly in emerging markets. The study also highlights that financial markets may absorb and transmit the effects of commodity price fluctuations—driven by China’s economic activity—beyond traditional trade linkages.
In conclusion, the study underscores the growing influence of China on emerging economies, with macroeconomic disturbances in China potentially driving economic cycles and affecting financial stability in these markets. As global financial integration deepens, understanding and anticipating these spillovers will be critical for policymakers and investors alike.
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