1 Introduction

China is now the second largest economy in the world at current exchange rates and, according to the International Monetary Fund, is forecast to overtake the United States later in the next decade in purchasing power parity (PPP) terms. Indeed China's economic performance over the last two decades has been remarkable, accounting for 3.9% of world gross domestic product (GDP) in 1990 but 15.0% in 2012.[1]These figures would be striking at any time, but in the context of faltering global growth since the onset of the 2008 financial crisis, they underline the importance of continued growth in China for the world economic outlook.

China is now the second largest market for New Zealand's product exports, behind only Australia. In discussing this, Bowman and Conway (2013a, 2013b) point particularly to the increased industrialisation and urbanisation of China. This, alongside increased per capita income and a changing diet, has led to rising demand for primary products from New Zealand, especially dairy, meat and forestry products. These effects are reinforced because Australia has also received substantial benefits from China's growth, with these most evident in its mining sector.[2] It is to be anticipated, therefore, that over recent years New Zealand has received positive spillovers from growth in China not only by increasing exports to that country, but also through effects on its long-term major trading partner, namely Australia.

This paper provides a quantitative analysis of the impact on New Zealand of economic growth in China through the framework of an econometric model. This complements the more descriptive analysis of Bowman and Conway (2013a, 2013b) by providing estimates of, for example, the effect on New Zealand of a one percent increase (or decrease) in China's output growth, comparing this with estimated effects from growth in the US. The analysis also compares the roles of China and the US for world commodity prices, which are important for New Zealand as an exporter of primary products. Finally, in the light of the increasing role of China in the world economy over the last two to three decades, the paper also investigates whether spillover effects from China to New Zealand have changed over this period.

A large literature exists on the role of the US in the international economy, with that country widely assumed to drive world economic growth. However, despite it now being the world's second largest economy, surprisingly few studies are currently available focusing on the role of China and, further, their results are somewhat ambiguous. In particular, Arora and Vamvakidis (2011) find large growth spillovers from China to both the rest of Asia and the world (38 and 172 countries, respectively) over the last two decades. On the other hand, although Sato, Zhang and McAleer (2011) detect evidence that the impact of China on other East Asian economies has increased since 1978, they conclude that growth in China plays a small role for that region relative to the US. Sun (2011) focuses on effects in New Zealand and Australia, studying the role of growth in 'emerging Asia' (including China) versus that in the US. Although Sun (2011) finds that 'emerging Asia' plays a stronger role than the US for Australia in the decade from 2000, she detects no impact from that region on New Zealand over the same period. This leads her to conclude that growth in 'emerging Asia' affects New Zealand only indirectly through its impact on Australia. Nevertheless, this is a surprising finding in the context of the different products exported by these two antipodean countries to China and that country's role as the second largest market for New Zealand exports.

The small group of papers mentioned in the preceding paragraph use broadly similar modelling methodologies based on vector autoregressive (VAR) models. Nevertheless, there are important differences across their approaches, as discussed in the next section. The present paper also employs a VAR modelling framework, but imposes restrictions in order to capture adequately the effect of a dominant world economy (China and/or the US, as appropriate) on New Zealand. Since Australia is New Zealand's largest trading partner, and in the light of the results of Sun (2011), our analysis also examines the role played by that country. Although previous VAR analyses for New Zealand, such as Buckle, Kim, Kirkham, McLellan and Sharma (2007) or Dungey and Fry (2009), employ a larger range of domestic variables than in the current study, more parsimonious specifications of the domestic sector are employed here to facilitate more detailed examination of international spillovers. In particular, those studies employ a single 'international' or 'foreign' economy, whereas we investigate separate effects for China, the US and Australia on New Zealand.

The paper is organised as follows. Section 2 discusses methodological issues in relation to previous studies and also the nature of the VAR analysis of this paper. This is followed by a discussion of the data employed, including some preliminary analysis, in Section 3. Our principal results are contained in Section 4, which examines spillovers to New Zealand from China and the US through a range of VAR models, focusing particularly on a specification that includes commodity prices. The following section then focuses on changes over time, with conclusions drawn in Section 6.