On the China factor in the world oil market: A regime switching approach 1

We investigate the relationship between China's macroeconomic performance and the world oil market over the past two decades. Unlike existing studies, we allow for possible regime changes by utilizing a class of Markovswitching vector autoregression (MS-VAR) models. The model identifies key regime changes in the structural shocks when the oil market experiences low and high volatility. We find that demand shocks from China and the rest of the world have a larger impact on the real price of crude oil during periods of high volatility. Supply shocks, in contrast, have a large effect on the price in the low volatility regime. A similar state-dependent phenomenon is observed for the impact of oil price shocks on China economic activity, however the size of these responses is relatively small. Thus, despite China being a major player in international oil markets, we conclude that oil market shocks tend to have little impact on China's real GDP growth. (c) 2021 Elsevier B.V. All rights reserved.

Automated summary

The study found that demand shocks from China and the rest of the world have a larger impact on the real price of crude oil during periods of high volatility, while supply shocks have a larger effect during low volatility regimes. There is a state-dependent phenomenon observed for the impact of oil price shocks on China economic activity, with relatively small responses noted. Despite being a major player in international oil markets, oil market shocks tend to have little impact on China's real GDP growth.