Essays on China’s Integration into the Global Economy and Financial Markets

The development of the Chinese economy and its financial market is set to continue over the coming years, resulting in deeper interconnectedness with the rest of the world. Given China’s state-centric economic structure, its economy differs from other leading economies; as such, China’s economic rise and its implications warrant increased interest in China-related matters by market participants, policymakers, and academia. Ms. McCully’s doctoral thesis contributes to the literature on China’s integration into the global economy. It studies it from various viewpoints, discussing financial market integration, increased global trade dependencies on China, and deepening trade and investment ties between China and Latin America.

The thesis consists of an introduction and three essays. The first essay “Drivers of Portfolio Flows into Chinese Debt Securities Amidst China’s Bond Market Development” focuses on China’s onshore bond market and the drivers of non-resident net portfolio flows into Chinese debt securities. It studies China’s bond market development by reviewing the main characteristics of the onshore market and important liberalization steps. It also describes recent trends in debt portfolio investment flows into China by non-resident investors. A theoretical model for push and pull factors is derived, functioning as a starting point for the empirical analysis on the drivers of bond flows into China. Both static and time-varying models are estimated to help explain the importance of various push and pull factors in the Chinese bond market context. The findings point to China’s continued bond market deepening and integration with the rest of the world.

The second essay “China Trade Exposure Index” studies countries’ economic dependence on China. As China will continue to integrate more deeply into the global economy and financial markets over the coming years, measuring and identifying other countries’ economic exposure to developments in China is becoming increasingly relevant. This essay builds a tool to measure and compare countries’ exposure to the Chinese economy through trade channels, using principal component analysis. The resultant China Trade Exposure Index ranks countries based on their economic dependence on trade with China. The essay further shows that the China Exposure Index is significant in explaining countries’ cyclical economic growth co-movement with China, with a higher ranking implying a stronger real GDP growth correlation.

The third essay “China-Latin America Economic Relationship” studies the characteristics of the bilateral economic relationship between China and Latin America since the beginning of the millennium, covering such aspects as trade of goods, direct investment, and lending. The relationship is uneven, both in terms of its economic importance and the composition of trade and investment, with China seemingly in a more dominant position. The essay analyses China’s and Latin American countries’ trade intensities, complementarities, comparative advantages, and competition dynamics, revealing that the Latin American economies cannot be considered alike. The countries’ existing and potential ties with China are varied due to the nations’ individual characteristics. Therefore, a collective regional approach to doing business with China may not be the optimal way forward, yet there are opportunities to strengthen the individual bilateral relationships further in a way that would result in mutual benefits.

Ms. McCully is an international economist with a long career in the financial industry in Canada and Singapore. Her expertise is in the global economy with a particular focus on Asia-Pacific.

Contact Tuuli McCully

Email: tuuli.mccully@gmail.com
Twitter: @TuuliMccully
LinkedIn: https://www.linkedin.com/in/tuuli-mccully-507b541b/