Does China transmit financial cycle spillover effects to the G7 countries?

Abstract

We use the state space model to describe the financial cycles of China and G7 countries since 1990, and the DY spillover index to quantify the spillover effects of China's financial cycles on G7 countries. We find that China plays the role of a net recipient most of the time. China's financial cycle net spillover index fluctuates widely and is vulnerable to economic events such as the financial crisis. This implies that international capital flows have brought volatility and shocks to the Chinese financial market, such as the Asian financial crisis and the 2008 international financial crisis. In addition, during 2004-2005 and 2014-2015, the G7 countries also suffered from financial cycle spillover from China. The US received most of the financial cycle spillover from China, followed by Canada, Germany, and Italy.