Towards Recoupling? Assessing the Global Impact of a Chinese Hard Landing Through Trade and Commodity Price Channels.

Abstract

China's rapid over the past decade has been one of the main drivers of the rise in mineral commodity demand and prices. At a time when concerns about the sustainability of China's model are rising, this paper assesses to what extent a hard landing in China would impact other countries, with a focus on trade and commodity price channels. After reviewing the main arguments pointing to a hard landing scenario – historical rebalancing precedents, over-investment, unsustainable debt trends, and a growing real estate bubble – we focus on a sample of thirty-six countries, and use a global VAR methodology adapted to conditional forecasting to simulate the impact of a Chinese hard landing. We model metal and oil markets separately to account for their different end-use patterns and consumption intensity in China, and we identify three specific transmission channels to net commodity exporters: through real exports, through income effects (related to commodity prices), and through investment (a fall in commodity prices reducing incentives to invest in the mining and energy sectors); we also look at the role played by the exchange rate as a shock absorber. According to our estimates, emerging economies (ex. China) would be hardest hit – with a 7.5 percent cumulated loss after five years –, in particular in South-East Asia but also in commodity-exporting regions such as Latin America; advanced economies would be less affected. The growth gap between emerging and advanced economies would be considerably reduced, leading to partial recoupling.