China's new normal and the implications to domestic and global business

• Author: Abdul‐Rashid Abdul‐Rahaman,Yao Hongxing
• Published date: 01 April 2020
• Date: 01 April 2020
• DOI: http://doi.org/10.1002/ijfe.1737

RESEARCH ARTICLE

China's new normal and the implications to domestic and global

business

Abdul-Rashid Abdul-Rahaman | Yao Hongxing

School of Finance and Economics, Jiangsu

University, Zhenjiang,China

Correspondence

Abdul-Rashid Abdul-Rahaman, School of

Finance and Economics, Jiangsu University,

212013 Xuefu Road, Zhenjiang, China.

Email:sochibga1publications@yahoo.com

Funding information

National Natural Science Foundation of

China, Grant/Award Number: 71701082,

71271103; National Science Foundation of

China, Grant/Award Number: 712071103

Abstract

We use a VEC model to analyse China's “new normal”and how they affect aggre-

gate components of China's balance of payment account, which represents China

and the rest of the world. We assessed whether the tightening financial conditions

impact China's long-run growth. We also assessed the reduction in savings and its

effect on growth. We further assess the claim of increasing net capital flows through

a stable currency. We also compute China's currency gains and losses in CFET

countries using the approach in and analysed how reducing national savings will

impact on currency gains in the FX market. Analysing the fluctuations in capital

flows, and its determinants, are significant for the restructuring since the govern-

ment has undertaken to reduce his participation in direct financing. The research

found that the gradual tightening of monetary policy if core inflation continues to

pick up will not affect the long run current account growth, whereas reduced sav-

ings will have a short-run adverse effect on growth. These conclusions support the

assertion in. Furthermore, the liberalization of the financial systems reduces growth

in the short run, whereas the fluctuations in renminbi have no impact on the capital

account. We, therefore, do not find evidence of currency stability, aiding and facili-

tating net capital flows. Also, the decision to tighten policy rates and the effects on

the capital account depends on the margin of the change. Lastly, the liberalization

reforms will increase currency gains and also trigger currency appreciations.

KEYWORDS

balance of payments, CFETS, financial reforms, monetary policy,vector error cor rectionmethod

1|INTRODUCTION

The 13th five-year development plan is the blueprint for

China's rebalancing reforms. This project aims to move

China away from an investment and credit led economy to a

consumption and a market-driven economy (Wang, 2013).

The executive board of the International Monetary Fund

commended the authorities' ongoing progress in

rebalancing the Chinese economy towards service and

consumption, and believe this is the way to ensure sus-

tainable growth (Article IV Consultation Report, 2017;

DeRosa, 2009). China is committed to this process and

actions are well advanced to implementing the reforms

(Lipton, 2016). The following are some of the actions

captured in the 13th five-year development plan, which

are currently ongoing:

Received: 11 January 2018 Accepted: 23 May 2019

DOI: 10.1002/ijfe.1737

Int J Fin Econ. 2019;1–15. wileyonlinelibrary.com/journal/ijfe © 2019 John Wiley & Sons, Ltd. 1

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