Abstract
The study examined the short- and long-run nexus between industrial growth, economic growth, oil production, inflation, and trade deficit of China, using quarterly data from 1995Q1 to 2020Q4. We used autoregressive distributed lag model (ARDL), after affirmation of long-run relationship and uni-directional causality. To examine short-run dynamics, an error correction model (ECM) was specified, and Granger causality test was conducted to find the direction of causality between variables. Empirical findings confirmed cointegration between trade deficit and industrial growth, economic growth, inflation, and oil production. Further, uni-directional causality between trade deficit and all independent variables was found, running from independent variables towards trade deficit. Results revealed that growth of industrial production index play a substantial role in determining trade balance of China. The study further confirms the effectiveness of economic growth and inflation for trade deficit, in both short run and long run. The findings are consistent with extant literature. On the policy front, a couple of suggestions including trade policies with special focus on industrial reforms, and loose monetary policies are made on the basis of derived conclusions.
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