Business Cycle Synchronization Value Added Trade Equity Market

Business Cycle Synchronization, Value Added Trade, Equity Market Linkages and Industrial Structure Linyue Li School of International Trade and Economics (SITE) Central University of Finance and Economics (CUFE) and Claremont Institute for Economic Policy Studies (CIEPS)

Different levels of Business Cycle Synchronization(BCS) Trade linkages, FDI and Business Cycle Synchronization (between China and world economy) Regional Business Cycle Synchronization (between China’s regional provinces or cities and world economy) Business Cycle Synchronization and Industrial Structure Business Cycle Synchronization, Value-added Trade and Industrial Structure Business Cycle Synchronization and Equity Market Linkages 2

Abstract This paper aims to provide a new theory of business cycle synchronization, in a framework that integrates value added trade, equity market linkages and industrial structure. The study combines the traditional economic cycle theory, the international economic cycle theory, the world economic cycle theory and its index system with latest new framework of business cycle model. The study of international trade and international financial interdependence will be timely and promising. Policy recommendations for China's response to the new characteristics of world economic cycle fluctuations have important theoretical significance and practical application value. JEL Code: E 32, F 15, F 42 3

Motivation and Introduction Is there “China Effect” in the transmission of world business cycle? There are some debate about China's economic growth rate and its impact on the global economy, such as whether it is good for the rest of the world if China's economic growth rate falls below 7%. “The Silk Road Economic Belt” and “the 21 st Century Maritime Silk Road” --- “One Belt And One Road”, or “OBAOR” for short. 4

Literature Review • The concept of world business cycle originates from the exploration of international business cycle. • The theoretical and empirical study of China's economy and world business cycle synchronization can be divided into the following three categories. • Frankel and Rose (1998): Demand Shocks due to more trade in intra-industry trade tends to increase business cycle synchronization. • Gruben, Koo and Millis (2002): Their model provides a framework to test whether specialization reduces business cycle correlations. • Shin and Wang Model (2003): Intra-industry trade has become the major channel through which the business cycles of East Asian economies have become more synchronized. • Dynamic factor model: Kose et al. (2008), Zi-hui Yang and Lei Tian (2013) • DSGE: Dong-zhou Mei et al. (2012, 2014), Dong-zhou Mei and Xiao-jun Zhao (2015): the asymmetric transmission of China-US business cycle resulting from incomplete financial market and bilateral asset holding is the crucial factor causing hugh negative impact from 2008 global financial crisis. • Romain Duval, Nan Li, Richa Saraf and Dulani Seneniratne (JIE 2016): Value-added trade and business cycle synchronization---a theoretical rationale for the role of value-added trade for synchronization using an international business cycle model that features input linkages in production. 5

Table 1. 1 st-order Auto-correlations and Standard Deviations of Different Economies Data Source: World databank, World Development Indicators (WDI). World China United States United Kingdom Australia France Germany Italy Japan Hong Kong Singapore South Korea Thailand Philippines India Indonesia Mexico Malaysia Euro area North America OECD members East Asia Pacific countries Standard Deviations 0. 0132369 0. 0269717 0. 0197957 0. 0205748 0. 0155983 0. 0147369 0. 019926 0. 0207385 0. 0252167 0. 0396768 0. 0403895 0. 0394009 0. 0401012 0. 0333992 0. 0282907 0. 037481 0. 0369584 0. 0367179 0. 0168047 0. 0195358 0. 0151701 0. 0159881 1 st-order Auto-correlations 0. 2176 0. 5261 0. 3184 0. 4838 0. 0867 0. 4049 0. 1782 0. 4903 0. 4236 0. 2744 0. 1414 0. 2531 0. 5255 0. 5061 0. 0699 0. 3105 0. 2458 0. 1966 0. 3810 0. 3108 0. 3488 0. 2115 Period 1978 -2014 1978 -2014 1978 -2014 1978 -2014 1978 -2014 1978 -2014 6

Chart 1. Foreign Value Added Part of China's Manufacturing Exports 7

Results China's economy and the world economy have long term equilibrium relationship from Granger Causality test results. As the degree of openness increases, the interdependence of China's economy and world economy is increasing, especially after "China Effects" emerges under the background of new normal. Global value chain (GVC) has changed the traditional statistic method of global trade, and the appearance of value added trade has posed new challenges to the existing research on business cycle synchronization through international trade and international financial channels. The results also imply that the Asian equity markets have more interdependencies with the advanced economy equity markets in the recent financial period than in before. 8

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Discussion The research on the transmission of business cycle synchronization through international trade, international finance, industrial structure and international policy coordination suggests that it is too soon to conclude that the Asian economies have decoupled from the advanced economies. Since 2008 global financial crisis, how to form the benign economic linkages of business cycle synchronization through the participation level of the global value chain (GVC) in mutual transactions is a meaningful topic to be explored under the background of world economic integration. China, as the center of global value chain, the control of participation levels in global value chain (GVC) as well as equity markets could avoid negative effects of external shocks. 11

Conclusion and Policy Implications "China Effect" has emerged significantly through the transmission channel of international trade, international finance and international economic cooperation. As the degree of openness increases, the interdependence of China's economy and world economy is increasing, China will make more and more contributions to the world economy for sustainable global development. China will make more contributions to the world economy for sustainable global development, through international coordination of macroeconomic policies. Taking the advantage of global value chain reorganization could upgrade processing manufacturing industry, further expanding the international market. 12

Thank you for your comments and Suggestion! 13