Macroeconomic shocks in China: Do the distributional effects depend on the regional source?

Abstract

There is a growing consensus that, as part of China’s “New Normal”, economic growth will slow permanently. Given China’s geographic diversity, the slowdown will likely have differential effects on China’s provinces which will interact with existing disparities. We investigate whether confining the initial effect of an aggregate shock to one of three regions (coast, centre and west) affects the inter-provincial distribution of its effects over time. We use two alternative models: a restricted VAR model of 28 provinces and three regions and a sequence of 28 four-equation VAR models. We find that the two methods give remarkably similar results—a shock to a particular region’s output has its main effects on the provinces in that region, although this differs over time and across regions. A shock which originates in the coastal region affects mainly the coastal provinces in both the short and long runs so that a growth reduction is likely to ameliorate existing inter-provincial disparities. However, there is more diffusion of the effects of a central shock, particularly in the long run. A shock to the western region also generates spillover effects in the long run although these are to the coastal provinces so that a growth slowdown will tend to reduce existing disparities.