Download External Shocks Fluctuation , Economic Opens and Economic

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External Shocks, Economic Opens and Economic Fluctuation
MA Yu
School of Economics, Shandong Institute of Business and Technology, P.R.China, 264005
Abstract: By use the data related to 25 provinces in 2008, researching the relationship of external
shocks, economic opens and economic fluctuations through real evidence. The conclusion shows: when
the economic occurs to the shocks, the lower external dependence is, the fewer bad influence it will, so
the development of economic is steady. Using the higher percentage of foreign capital, the crisis has a
lower shock to Chinese economic.
Keywords: Financial crisis, economic opens, economic fluctuations
1 Preface
The 2008 financial crisis brings huge impact to the world economy, Chinese economy is also not
spared ,appearing the phenomenon of the increasing of business failures ,export and economic
declining, on the half year of 2009 , the increase rate of Chinese GDP decrease to 7.1% , the gross value
of Import and export drop 23.5% , the original price of industrial products drop 5.9%[1] , to such a
economic country like china which is moving to fully open ,what is the relationship among external
shock , economic opens and economic fluctuations , Whether the higher economic openness, are the
external shocks caused an economic fluctuation the more serious ? this is a inevitable question ,this
paper will study this question systematically .
There are some scholars have study the effect of external shocks, Kim, etc. (2004) found that capital
inflows into South Korea made the economic appear larger fluctuation. Kaminsky and Schmukler (2003)
draw the conclusion through empirical research of emerging market countries with the large sample, that
is although opening leads to short-term economic fluctuation, in the long run, opening will have the role
of stabilizing market. Hsiao and Hsiao (2006), using eight Asian countries as sample studied the
causality of GDP, export and FDI, the results showed that FDI to GDP has direct one-way role, and also
through exports play the role to GDP, and export and GDP exists between the two-way causality.
ChaiTianMingFu (2006)held that Japan and the Britain's inflation blamed on the increasing price of
crude oil, gold, copper, aluminum and other raw material and labor in 1970s ,also Reconfigure
manufacturing is another reason . Genberg and Panwels (2003) think under the condition of open
economy, when the price of raw materials raises at home, manufacture will import them from abroad to
reduce production cost. Rogoff (2004, 2006) think globalization competition made the short-term
phillips curve more steep. Roberts (2006) argued that the phillips curve became more gently through the
empirical analysis.
Some other scholars research the effect of external shocks to Chinese economic. HePingPing,
LiZhengHui, LvZhongWei (2005) found international economic fluctuations have a strong impact on
Chinese economic cycle fluctuations. LongJiancheng etc (2003) think, with Chinese economy opening
degree enhances, external factors became more and more important to Chinese economic. JiaJunXue,
GuoQingWang (2006), using1992-2005 quarterly data as the basis and American economic fluctuations
as example, they analysis external shocks have a impact on Chinese macroeconomic stabilization
through international trade and financial markets. DuTing, PangDong (2006) study international trade
shock have a effect on economic cycle fluctuations by international multiplier effect as the basic of
international trade fluctuations characteristics and economic cycle fluctuations theory. SunLiJian,
SunLiHang (2005) uses EGARCH - VAR model testing the relationship of the opening up and Chinese
macroeconomic fluctuations, Chinese economic growth and macro stabilization group (2008) think,
1
Data came from the national bureau of statistics website.
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external shocks is one of factors caused Chinese inflation.
This paper is divided into five parts: the first part of this part, namely the preface, The second part is
theory and assumption, analysising the relationship of energy consumption level, external dependence
analysis, marketization and external shocks; The third part is model building and data description; The
fourth part is econometric analysis; The fifth part is the conclusion and enlightenment.
2 Theory and Assumption
External shocks influence the country’s economic through many channels , Mainly including the import
and export of goods and services, capital inflows and outflows, expectations, domestic and foreign
exchange rate of the asset price many channels effect, etc. To China, external shocks influence entity
economic mainly by trade channels and assets channels, the decrease of export directly reduced the
demand for Chinese goods in abroad, the decrease of FDI reduces the China investment demand and the
related production products and labor requirements.
In recent years, import and export trade play expanding requirement scale and optimize the allocation of
resources two functions, also play a huge role to Chinese economic growth. On 2007 net exports spur
the GDP reaching to 2.7 percent, on 2008 exports attain 32.5% of Chinese GDP.[2] Export proportion
improving significantly explain, in the procedure of economic structure upgrading and economic
development, exports as a important requirement factor play a more important role to economic growth.
the results show, Manufactured goods export every increases by 1%, industrial output growth may cause
0.667 percentage points, heavy industry products export every increases by 1%, heavy industry output
growth may cause 0.506 percentage points. [3] By expanding exports, China increases the effective
demand, expands employment, increases foreign exchange income. In order to enhance the international
competitive power of products, the company must product, pack, sale according to international
standard. That can promote Chinese enterprise production level, technology level, market sale level and
help the whole Chinese economic develop fast. So, we propose hypotheses 1.
Hypotheses 1: The bigger external dependence is, the greater the external economic impact of volatility
will be. FDI play a huge role to Chinese economic growth. Firstly, FDI increase investment in china;
secondly ,FDI bring advanced technology and scientific management experience, stimulating the
traditional industry changing and upgrading, FDI also produces demonstration effect and diffusion effect,
and promotes domestic technical level, thus reaching the purpose of narrowing the gap with the
international advanced levels. Again, The introduction of FDI create a large number of employment
opportunities and effectively relieve the pressure of employment in China. The number of enterprises
with foreign investment are tending to has been increasing, not only the absolute number of employees,
but the percentage of the national practitioners. The absolute number of employers got to 15,380,000 in
2007, accounting for 5.39% of Chinese urban employers. [4] FDI influence Chinese economic greatly.
When the financial crisis comes, if a large number of foreign capital inflows into china, it will be helpful
to defend the disadvantage effect that external shocks bring, so the economic will be stable. Now, we
propose hypotheses 2:
Hypotheses 2: The higher proportion of foreign investment is, the lower economic fluctuations will be
subject to.
3 Model Building and Data Description
We Build the model about the relationship among external shocks, economic opens, economic
2
The data released by the national bureau of statistics
The state council development research center group. Import and export trade and economic growth of China [N].
Economic daily, 2004-7-21.
4
Calculate according to the national statistics data
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fluctuations. In the third quarter of 2008 global financial crisis broke out, the crisis had a strong impact
on Chinese economic and made the economic growth decline sharply, so we use the magnitude of
economic decline rate as the dependent variable, besides external shocks, Chinese economic is also
Under the influence of the internal economic relevant factors, these factors can be represented by
monetary policy and industrial structure, because consumption requirement and investment requirement,
etc are mainly influenced by monetary policy, And the industrial structure in a certain extent can
represent the ability of economic external shocks.
Constructing the model of external shocks, opening up and economic fluctuation are as follows:
gdp = c + β1 sanch + β2 duiwai + β3daikuan+ β4 waizi + ε
The meaning of the variables in the formula shows in table 1, C is constant items, β1 … β 4 is the
regression coefficients, ε is the perturbation terms.
We use Chinese 25 provinces 2008 cross-section data as sample, economic fluctuation can be presented
by all the provinces GDP growth rate minus 1996 to 2008 average GDP growth rate. The third industry
accounted for can be presented by the provinces’ third industry output value of GDP board. external
dependence can be presented by import and export output value of gross regional product. Monetary
policy can modify the economic mainly through changing currency supply to influence effective
demand, but in china currency supply expansion or contraction mainly for increase or decrease of the
amount of bank loan, so monetary policy can be presented by bank loan growth rate. Foreign investment
to GDP ratio can be presented by the actually utilized foreign capital divide gross regional product.
Variable meaning shows in table 1.
The data used by this paper are all from the provinces statistical information nets.
Table 1 Variable meaning
serial number
The meaning of variable
variables
1
gdp
2
sanch
Proportion of tertiary industry
3
duiwai
External dependence
4
daikuan
The growth rate of bank loans
5
waizi
Foreign investment to GDP ratio
The decline range of GDP
4 Econometric Analysis
We use the model and the 25 provinces’ data to conduct empirical analysis, the results show in table 2.
From the various indicators of model, the fitting effect of model is good. From table 2,we can see that
trade dependence has a significant influence on economic fluctuation, the result is significant under 1%
level and the symbol is negative, this demonstrates the higher external dependence is, the GDP growth
drops more heavily, the result is consistent with our understanding, because for Chinese economic
growth, export is one of the main driving forces, but global crisis leads to exports dropping significantly,
so the higher external dependence of the province is, the economic of this province will be influenced
more heavily, economic growth should naturally have more negative effects. These results support this
assumption 1.
From table 2, we can find the regression symbol of The third industry accounts for is positive, the results
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demonstrate the relationship between industry structure and economic fluctuation is not significant.
Maybe because China is in the period of rapid economic development, the region of economic rapid
development and the higher level of economic development is also more opening up, it has more
economic affairs with foreign countries, it is Vulnerable to external shocks, at the same time, these
regions’ industry structure upgrades quickly, the third industry has a higher percentage, so these regions
don’t appear the results of the high ability of resistance of external shocks.
Foreign investment to GDP ratio is significant to economic fluctuation under 10% level and the symbol
is positive, this demonstrate under the shock of financial crisis, the more capital absorb into China, the
lower economic fluctuation will be. The financial crisis happened in the third quarter of 2008, And in the
first half of the world economy was still a fervent, a large amount of capital had inflowed into China and
spurred the economic growth of the provinces which the foreign capital inflowed. The foreign capital
which inflows into China can resist the disadvantage of crisis shocks, Foreign investment to GDP ratio
is significant to external shocks, in addition, the effect is positive, therefore, the empirical results support
this assumption 1.
From the result of regression, we can see monetary policy is not significant with economic fluctuation,
this is in some extent out of our expectation, maybe the reason is that Chinese economic growth
downturn was mainly due to external shocks, not the results of internal factors interacting. China's
massive aid plans and investment plan is formulated in the fourth quarter, the policy is carried out in
2009, so the 2008 fiscal and monetary policy have no effect on economic downturn.
Through the above analysis, we can see that the empirical results support this assumption 1, assumption
2
Variable
C
sanch
duiwai
daikuan
waizi
Table 2 Regression results
Coefficient
Std. Error
-1.124046
1.345900
3.124792
4.742856
t-Statistic
-0.835163
0.658842
Prob.
0.4135
0.5175
-3.314542***
1.165620
-2.843587
0.0100
0.074881
0.108980
0.687104
0.4999
38.63355*
20.13930
1.918316
0.0695
R-squared
0.428332
Mean dependent var
0.925200
Adjusted R-squared
0.313999
S.D. dependent var
2.066088
S.E. of regression
1.711241
Akaike info criterion
4.089171
Sum squared resid
58.56693
Schwarz criterion
4.332947
Log likelihood
-46.11464
F-statistic
3.746337
Durbin-Watson stat
2.276080
Prob(F-statistic)
0.019694
* * * says the 1% level under significant, * * said at 5% level under significant, * said in 10% levels significant.
5 Conclusion and Enlightenment
This paper uses 25 provinces 2008 relative data, apply the method of empirical study to research the
relationship of the external shocks, opening up and economic fluctuation, then we draw the conclusion:
when the country meet external shocks, the lower foreign independence is, the economic will have little
negative effect, the development of economic will be stable. The percentage of foreign capital is higher,
the crisis will have a little impact to Chinese economic.
Industry structure and monetary policy is not significant to economic fluctuation, in 2008 the economic
downturn is mainly due to external shocks, domestic factors is not significant. From the above research
conclusion, we can get the following enlightenments; with the enhancing of marketization, China
participate more in international market, international division of labor than before. So, in the short run,
，
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Chinese external dependence will be still maintained at a higher level. Therefore, external impact on
Chinese economic negative influence in certain degree is unavoidable. In the long run, China should try
to reduce external dependence and reduce the influence of external shocks.
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