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VOL. 11, NO. 5 • MAY 2016

DALLASFED

Economic
Letter
Impact of Chinese Slowdown
on U.S. No Longer Negligible
by Alexander Chudik and Arthur Hinojosa

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ABSTRACT: The impact of the
Chinese economy on the
U.S. has notably increased
over the past two decades.
Econometric modeling shows
that the U.S. economy is more
likely to directly and indirectly
(through its trading partners)
feel the impact of a negative
shock to Chinese output.

C

hina has become a systematically important economy in the
world, accounting for about
one-sixth of the global economy.1 It is, therefore, of no surprise that a
slowdown of Chinese economic activity
impacts many economies globally, including the U.S.
Reliably quantifying these effects is
very challenging. Most notably, data quality and availability and changing relationships between economies over time complicate efforts. There are also some technical (but nevertheless important) problems
arising from modeling the global economy
that features many interdependent individual economies.
Using an econometric technique that
examines interdependence of individual
economies in the global economy, the
Chinese slowdown and its impact on U.S.
output growth can be assessed, as well as
changes in the relationship since 2000.
Thus, it appears that the impact of
slowdown in China on the U.S. economy
has increased over time—at the turn of the
century, slower growth in China would
have had a small effect on the U.S. Today,
reducing Chinese output growth by 1 percentage point shaves about 0.2 percentage
points from U.S. output growth.

China’s Rise
China began its expansive economic
journey under the communist leader

Mao Zedong who founded the People’s
Republic of China in 1949. China was
regarded as highly inefficient and
relatively isolated during the pre-1978
communist period. From 1953 to 1978,
China nonetheless achieved respectable
growth. Its real (inflation-adjusted) gross
domestic product (GDP), a broad measure of economic output, expanded at a
5.6 percent average annual rate.
However, it wasn’t until the post-1978
economic and political reforms took
effect that output growth reached the
high levels economists have since come
to expect of China. Driven by a dramatic
increase in manufacturing productivity,
the economy has expanded at a 9.4 percent average annual rate since 1978, doubling in real terms approximately every
eight years.2
China has subsequently emerged as
one of the world’s largest economies in
the last decade, exceeding that of the
U.S. by some measures. China’s share
of global GDP on a purchasing power
parity basis—reflecting what the value
of China’s goods and services would be
were they sold in the U.S—rose from 2.4
percent in 1980 to 17.2 percent in 2015.
Meanwhile, the U.S. share of global GDP
fell from 22 percent in 1980 to 15.9 percent in 2015.3
China’s increased influence in the
global economy is particularly noticeable when considering the evolution of

Economic Letter
Chart

1

one-year-ahead forecast errors (defined
as the forecast minus the actual data)
in the case of China averages about 1.7
percentage points; the largest since 1995
equaled almost 6 percentage points.
Although it’s possible that Chinese
growth will fall outside the prediction
range, it nevertheless appears likely
Chinese growth will gradually decline.
The presumed drop begs the question
how it will impact U.S. growth.

China’s Trade Importance Accelerates Since 2000

Percent, share of world trade

18
16
United States

14

China

12
10
8

Growth Slowdown Impact

Germany

6
4

Japan

2
0

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

NOTE: Chart shows the share of foreign trade in the global trade for four selected countries (U.S., China, Germany and
Japan).
SOURCES: International Monetary Fund’s Direction of Trade Statistics (IMF DOTS) database; Haver Analytics; authors’
calculations.

foreign trade flows. The share of Chinese
foreign trade flows in global trade has
skyrocketed since the early 2000s, in part
reflecting the emergence of China as the
world’s largest manufacturer (Chart 1).

China’s Future Output Growth
China has experienced a decrease in
its pace of output growth since 2010, a
deceleration that accompanied slowing
in other advanced and emerging economies (Chart 2). Despite the slowdown,
the Chinese economy still expanded
6.8 percent from fourth quarter 2014 to
fourth quarter 2015. This rather impres-

Chart

2

sive growth, coupled with the size of the
Chinese economy, made China the largest contributor to global output growth,
accounting for approximately 40 percent of
overall global growth in 2015 (Chart 3).
China’s output growth is expected to
slow down even more, albeit relatively
gradually. The survey of professional
forecasters conducted by Consensus
Economics in March estimates real
output growth of 6.4 percent for 2016.
Individual forecasts for the year range
from 5.8 percent to 6.7 percent. Such a
narrow band does not necessarily imply
forecast accuracy. Historically, the size of

A Chinese output slowdown would
affect the U.S. and other economies
through several channels. Natural
resources such as crude oil, gas and other commodities are traded globally, and
global supply and demand affect their
prices. Due to its sheer size, a Chinese
slowdown (or expectations of it) can have
considerable ramifications for the global
demand of commodities.
Declining commodity prices can
affect individual economies, with
exporters generally sustaining ill effects.
Another important channel, through
which the Chinese economy affects the
U.S. and the rest of the world, is direct
and indirect foreign trade in goods and
services. Regardless of the direct trade
exposure of the U.S. economy to China,
a Chinese slowdown negatively affects
U.S. foreign trade partners, which will
eventually spill over to lower U.S. output
growth. Such indirect (or “third country”)

Chinese Output Growth Slows Along With Other Advanced, Emerging Economies

Percent
10
9

2010

2015

Advanced economies

Emerging economies

8
7
6
5
4
3
2
1
0

World Advanced Emerging
(ex. U.S.) (ex. U.S.)

U.S.

Japan

U.K.

Euro area Canada Australia

Other
advanced

China

Asia
Latin
Other
(ex. China) America emerging

NOTES: Chart depicts real output growth in 2010 and 2015. Data for 2015 are estimated in economies where gross domestic product for the full year is not available. World and advanced economies
(both excluding U.S.) and emerging economies are trade-weighted aggregates defined in the Federal Reserve Bank of Dallas’ Database of Global Economic Indicators.
SOURCES: International Monetary Fund’s World Economic Outlook (IMF WEO) database; Haver Analytics; Dallas Fed.

2

Economic Letter • Federal Reserve Bank of Dallas • May 2016

Economic Letter
Chart

3

China Remains Major Contributor to Global Output Growth in 2015

Percentage points

80
Purchasing power parity-weighted global aggregate

70

U.S. export- and import-weighted global aggregate

60

U.S. export-weighted global aggregate

50
40
30
20
10
0

Advanced Emerging
(ex. U.S)

U.S.

China

Mexico

Canada

India

Venezuela

Korea

Germany

U.K.

Japan

Malaysia

Rest

NOTES: Chart depicts percentage-point contributions to global growth aggregate. Three definitions of global growth aggregate are considered—all based on 40 countries available in the Federal Reserve
Bank of Dallas’ Database of Global Economic Indicators.
SOURCES: Dallas Fed; authors’ calculations.

effects can be rather important in a globalized world.
Financial interlinkages and confidence effects are also very important
channels through which the transmission of economic shocks occur, as turmoil in Chinese stock markets vividly
demonstrated.
Accurately measuring so many channels, often simultaneously, can be a
Herculean task. Instead, a more direct
data-driven, “reduced form” econometric approach is employed to estimate the
impact of sudden, negative economic
change. Specifically, a global vector

Chart

4

autoregressive (GVAR) model of output
growth is used with a dataset featuring
quarterly real output growth data for 22
advanced and emerging economies from
first quarter 1980 to second quarter 2015,
along with data on annual bilateral trade
flows covering 1980–2014.
This approach can be briefly
described in two steps. In the first step, a
country-specific model, featuring domestic variables and country-specific tradeweighted averages of foreign variables, is
estimated for all countries. In the second
step, the individual country models are
stacked and solved in one large, coherent

Estimation Findings
Using the GVAR modeling approach,
Chart 4 shows the effects of a Chinese
output growth shock that immediately
lowers China’s GDP growth by 1 percentage point. Chart 4A shows the impact

Estimated Impact of a Chinese Output Shock Increases Since 2000
(Deviations of real output growth from baseline)

A. Year 2000

B. Year 2015

Percentage points

Percentage points

0.2

0.2

0

0

–0.2

–0.2

–0.4

–0.4

–0.6

–0.6

10%–90% confidence bounds
China

–0.8

10%–90% confidence bounds
China

–0.8

U.S.

U.S.

–1.0
–1.2

global interdependent system featuring
all variables.4
Such GVAR models are increasingly
used by policy institutions, including
the International Monetary Fund and a
number of central banks to analyze spillover effects across countries of various
economic scenarios.

–1.0
0

1

2

3

4

5

6

7

8

–1.2

0

1

2

3

4

5

6

7

8

NOTES: Charts show the impulse-response functions of a –1 percentage-point shock to China’s real output growth. Shaded area shows a 10 percent–90 percent confidence interval in which the result
could fall.
SOURCES: Federal Reserve Bank of Dallas’ Database of Global Economic Indicators; International Monetary Fund’s Direction of Trade Statistics database; authors’ calculations.

Economic Letter • Federal Reserve Bank of Dallas • May 2016

3

Economic Letter

of such a shock in 2000; by comparison,
Chart 4B depicts a shock of the same
magnitude in 2015. The red line signifies
the effect of the shock on Chinese output
growth and is equal to –1 percentage
point at the time of the impact (by definition, the impact of the shock).
Eventually, the consequences of this
negative shock on the Chinese economy
dissipate—the red line converges to
zero as the time horizon (shown on the
horizontal axis) increases. The blue line
shows the impact of the shock on U.S.
output growth, while the blue shading
depicts the 10–90 percent confidence
bounds—the range in which the results
could statistically fall. Notably, such a
confidence interval implies that there is a
1-in-5 chance that the impact of the negative shock to China’s economy would
fall outside the depicted bound.
The findings suggest U.S. output
growth would have incurred a relatively
small decline from a shock in 2000. Since
the zero line is included within the confidence bounds, it isn’t certain that the effect
is statistically different from no effect.
The reaction is more pronounced in
2015, with U.S. output growth declining
by about 0.2 percentage points and persisting over several quarters. This estimate is approximately four times larger
than the one for 2000.

Significant Impact
Over the past few decades, China’s
economy has grown very strongly,
similar to Korea and Taiwan previously.

DALLASFED

China has evolved into an economic
juggernaut in a relatively short time,
prompting economists to consider possible future impacts on U.S. and global
economies.
While the U.S. economy does not
have very large direct trade exposure
with China, it is still significantly affected
by a slowdown in Chinese output
growth. Such an affect is roughly onefifth the size of the output shock initially
observed in China.
Alexander Chudik is a research economist
and Arthur Hinojosa is a research assistant in the Research Department of the
Federal Reserve Bank of Dallas.

Notes
The metric used is China’s share of global gross
domestic product on a purchasing power parity basis in
2015. These statistics are taken from the International
Monetary Fund’s World Economic Outlook Database.
2
See “Long View of China Suggests Inevitable Slowdown,” by Anton Cheremukhin, Federal Reserve Bank
of Dallas Economic Letter, vol. 10, no. 10, 2015, for
a broader perspective and additional details about the
economic rise of China. The underlying data sources for
the Chinese national accounts are the China Statistical
Yearbook and 60 Years of New China, both published by
the Chinese National Bureau of Statistics.
3
Statistics are taken from the International Monetary
Fund’s World Economic Outlook Database.
4
A detailed description of the methodology is presented
in “Theory and Practice of GVAR Modeling,” by Alexander Chudik and M. Hashem Pesaran, Federal Reserve
Bank of Dallas Globalization and Monetary Policy
Institute, Working Paper no. 180, May 2014.
1

Economic Letter

is published by the Federal Reserve Bank of Dallas.
The views expressed are those of the authors and
should not be attributed to the Federal Reserve Bank
of Dallas or the Federal Reserve System.
Articles may be reprinted on the condition that
the source is credited and a copy is provided to the
Research Department of the Federal Reserve Bank
of Dallas.
Economic Letter is available on the Dallas Fed
website, www.dallasfed.org.

China has evolved
into an economic
juggernaut in a
relatively short time,
prompting economists
to consider possible
future impacts on U.S.
and global economies.

Mine Yücel, Senior Vice President and Director of Research
Michael Weiss, Editor
Dianne Tunnell, Associate Editor
Ellah Piña, Graphic Designer

Federal Reserve Bank of Dallas
2200 N. Pearl St., Dallas, TX 75201