External Shocks And Chinese Economy Fluctuation

Since the beginning of the new century, China’s economy has appeared twice substantial fluctuations, the first period is during the high-tech bubble burst in2001,the other period is during the global financial crisis between2008-2009.As one of the major influencing factors in those two macroeconomic volatility, external shocks had been subjected to wide attention.As a typical export-led economy, Chinese trade sector changes greatly since1996, the landmark event is the processing trade accounted for more than half of the total import and export volume, after which the ratio was maintained until2010. As the results of global production networks extension in China in the past two decades, processing traders imported raw materials and components from abroad, machining and assembly and then export to foreign manufacturers. Such a production and trade patterns bring three impact at least:First, the processing trade is more deeply embedded into global value chain. As Raw materials/components market and final product market are both abroad, processing traders often corporate with foreign enterprises closely. This production and trade patterns means that once a link in the value chain encounters some troubles, it will give rise to the fluctuations of the production processes in the entire value chain. Second, the rise of processing trade has changed the trade sector’s contribution of GDP. Due to the added value of processing trade sector is significantly smaller than other sectors, its widespread will certainly affect the composition of GDP and its growth. Third, the rise of processing trade has changed the relationship between the domestic and foreign factor inputs. In general trade sector, the imported intermediate input and domestic intermediate input is more like a substitutes; in processing trade sector, the imported intermediate input and domestic intermediate input is like a complement. Thus, the rise of processing trade has actually changed China’s total production function, technical condition and factor demand model.According to the three new characteristics China appeared when she joining into the international production network, we believe that external shocks will affect China’s macroeconomic in a new way. For example, the first characteristic may lead more quickly response to external shocks:the second characteristic may lead to reduce the impact of external shocks upon GDP; the third characteristic may lead to the impact of external shocks on investment, employment changes. However, in the author limited range of literature reading, we still don’t see much researches on how external shocks affect China’s macroeconomic in the view of international production networks. In order to fill this possible gap, we incorporate those three characteristics into classical macroeconomic model to drive new findings.Put those findings together, this Ph.D. thesis get such conclusion:To avoid macroeconomic ups and down, China meets a dilemma—regardless of the proportion of processing trade and general trade, China can’t reduce the impact of external shock upon China. This dilemma is rooted in China’s integration into the international production networks, is a reflection of China’s production specialization. Therefore, we should have a higher tolerance of macroeconomic fluctuations. By improving the control over the value chain, further diversifying the external market, as well as improved processing traders, we can find one solution which can maintain macroeconomic stability while improving efficiency of trade sector.