to the challenge posed by china ’ s rise. 1 i believe that this impression has more to do with the specificities of the institutional setting of europe than with a lack of awareness and initiative from individual european policy makers. to be sure, today i will mainly take a european perspective on china. in doing so, i will first deal with two global aspects of the emergence of china that are of particular interest to my institution : its potential impact on ( i ) inflation dynamics and ( ii ) the patterns of international capital flows. i will then focus on ( iii ) the growing economic ties between europe and china and their implications. finally, i will conclude by providing a few comments on ( iv ) the constructive relations of european policy makers, including the european central bank ( ecb ), with our chinese colleagues, in the broader framework of international policy cooperation. see “ the china trade syndrome ” in the charlemagne section of the oct 4th issue of the economist. 1. two important channels : inflation and capital flows the growing weight and impact of china on the global economy has become an indisputable fact that no policy maker or business leader can ignore. china overtook the uk to become the fourth largest economy in the world in 2006 in terms of nominal gdp and is already the second largest economy when measured in ppp terms. according to the latest imf projections china could overtake germany in 2008 and become the third largest world economy after the us and japan. in terms of contribution to global gdp growth in 2006, china accounted for 11. 2 % of global real gdp growth in 2006, compared to 14. 5 % for the us. on the basis of its relative weight in ppp terms it accounted for 31 % of global real gdp growth compared to 10. 4 % for the us. it will not surprise you if i start by addressing the implications for price stability. although money and monetary policy ultimately determines inflation, globalisation seems to have embedded some effects on inflation in the short term. this takes the form of a two - sided coin. the doubling, from around 1. 5 to 3 billion, of the global labour force after the fall of the berlin wall – with new workers coming from formerly planned economies in the 1990s and then from population giants such as china – has exerted downward pressure on import prices of manufactured goods and on wage demand in mature economies, also compressing firms ’ price - cost mark - ups. but there have been other, opposite forces : certain resources, such as oil

us dollars. on 12 october, the australian government introduced a guarantee on wholesale debt and deposits. this followed on from the introduction of the guarantee in ireland on 30 september. with the guarantee in place in many other countries, australian banks would have been at a significant disadvantage in terms of funding costs without the guarantee. in addition, the guarantee allowed the banks to access another group of investors who had an appetite for sovereign credit but not bank credit. it is interesting to consider the question of how much the guarantee addressed the issue of quantity or price. there was a period of time where debt markets were closed at any price in the last quarter of 2008. but at some point it became more an issue of price rather than quantity. as an indication of the price that might have had to be paid, goldmans issued a bond around this time at a spread of 500 basis points. it is also worth noting that short - term funding continued to be issued by the australian banks without the need for a guarantee. both the rba operations and the government's funding guarantee were priced such that usage would decline as market conditions improved, and, indeed, that is what happened. the many fed facilities introduced to address market dysfunction were priced the same way. that is an important lesson which has been around since the time of bagehot. these facilities were introduced to facilitate the flow of credit to the real economy at a reasonable price and, in some cases, alleviate the need for asset fire sales, which have the capacity to tip markets and the economy into a worse equilibrium. it is also worth noting that the depreciation of the exchange rate also helped out on the funding side. with a lower exchange rate, a given amount of $ us funding translates into more australian dollars to fund australian dollar assets. unlike in some other countries, the maturity - matched hedging of the banks'offshore funding meant there was no issue of currency mismatch. indeed the csas ( credit support annexes ) associated with those hedges actually provided a short - term source of additional funding. finally, the similarity of the business models of the australian banks was probably beneficial in the gfc. there was not much to differentiate between them, which meant that the counterparty uncertainty present in other banking systems was nowhere near as prevalent here. https : / / www. rba. gov. au / speeches / 2018 / sp - dg - 2018 - 12 - 06. html 8 / 13 12 / 6 / 2018 lessons and questions