Global Spillovers of China's Monetary Policy

• Published date: 01 May 2024
• Author: Wenni Lei,Dongzhou Mei,Mi Zhang
• Date: 01 May 2024
• DOI: http://doi.org/10.1111/cwe.12530

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 1–30, Vol. 32, No. 3, 2024 1

Global Spillovers of China’s Monetary Policy

Wenni Lei, Dongzhou Mei, Mi Zhang*

Abstract

Spillovers from China’s monetary policy have become increasingly obvious with China’s

growing importance in the global economy and its close economic and trade ties with

the world. This study establishes a proxy structure vector autoregression model to

investigate the magnitude and transmission channel of spillovers from China to global

and regional economies, taking advantage of high-frequency changes in asset prices

in the financial markets to identify monetary policy shocks. The analysis reveals that

China’s monetary policy can affect the global economy by influencing international

trade and commodity prices but there is no evidence of China’s monetary policy

affecting global financial variables. Tightness in China’s monetary policy can cause

a decline in world output whereas expansion in monetary policy can support global

trade and output. This study also finds that the response of emerging Asian economies

to China’s monetary policy shock was nearly twice that of developed economies, while

the transmission path did not change. The results of this study are consistent with the

stylized fact that China’s monetary policy plays an important role in the global trade

and commodity cycle, although it does not drive the global financial cycle.

Keywords: China’s monetary policy, commodity prices, external instruments, global

trade, spillovers

JEL codes: E52, F41, F42

I. Introduction

China has witnessed unprecedented economic growth over the past 40 years and has

become the world’s second largest economy (Zhang and Shen, 2012). Its strengthening

economy and its improving trade status have led to spillover effects from its monetary

policy. However, the existing literature primarily focuses on spillovers from US

*Wenni Lei, Associate Professor, School of Economics, Minzu University of China, China. Email:

lwnpku@126.com; Dongzhou Mei (corresponding author), Professor, School of International Trade and

Economics, Central University of Finance and Economics, China. Email: meidongzhoupku@126.com;

Mi Zhang, PhD Candidate, School of International Trade and Economics, Central University of Finance and

Economics, China. Email: zhangmi@email.cufe.edu.cn. The authors are grateful for support from the National

Natural Science Foundation of China (No. 71803008) and the Fundamental Research Funds for Central

Universities (No. 2022QNPY32).

© 2024 The Author(s). China & World Economy published by John Wiley & Sons Australia,

Ltd on behalf of Institute of World Economics and Politics, Chinese Academy of Social Sciences.

This is an open access article under the terms of the Creative Commons Attribution License,

which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

[Correction added on 8 February 2025, after first online publication: The copyright line was changed.]

Wenni Lei et al. / 1–30, Vol. 32, No. 3, 2024

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

2

monetary policy because the US and the US dollar dominate the international monetary

and financial system (Farhi and Maggiori, 2018; Ilzetzki et al., 2019) and, consequently,

US monetary policy has become the main driver of the global financial cycle, affecting

global economic and financial activity through global asset prices, credit, capital flows,

and risk appetite (Miranda and Rey, 2020). Given differences between the positions of

the US and China in the international financial system, economic growth, and financial

development, the international transmission of China’s monetary policy differs from

that of US monetary policy. It is therefore essential to know the potential magnitude

of impacts and transmission channels of China’s monetary policy and to explore how

different economies react to shocks.

Figure 1 shows changes in policy rates in China and the US from January 2012 to

December 2019, along with global commodity prices and the volatility index (VIX)

(a measure of global risk-aversion sentiment). It reveals that China’s monetary policy

was stable from 2015 to 2016, gradually tightened from 2017 to 2018 to address financial

risks and asset bubbles, and then shifted to a looser cycle after 2018. Meanwhile, the US

witnessed a consistent increase in the policy rate, leading to a relatively tight cycle. The

increase in the US policy rate was accompanied by an upward trend in the VIX index,

Figure 1. Changes and characteristics of policy rates in China and the US

Sources: IMF Direction of International Financial Statistics (http://data.imf.org/?sk=4C514D48-B6BA-49ED-

8AB9-52B0C1A0179B&sId=1390030341854) and the Wind database (h ttps://www.wind.com.cn/portal/

zh/EDB/index.html).

Note: The US policy rate is represented by the federal funds rate whereas C hina’s policy rate is reflected by

the 7-day repo rate.

© 2024 The Author(s). China & World Economy published by John Wiley & Sons Australia,

Ltd on behalf of Institute of World Economics and Politics, Chinese Academy of Social Sciences.

This is an open access article under the terms of the Creative Commons Attribution License,

which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.