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We study the effects of external shocks on the business cycle in China and its sectors (agriculture, industry, and services) in terms of real GDP growth using several small‐dimensional VAR models with Cholesky identification for the period 1996–2014. We show that China—in particular its industrial sector—is susceptible to shocks, which can be related to a trade channel, a financial channel, and a confidence channel of business cycle transmission from major trading partner countries to the Chinese economy. We build on the previous literature by explicitly focusing on the response of the Chinese economy at the sectoral level and investigating the presence of confidence channels by analyzing the reaction in Chinese business and consumer confidence. If interpreted from the perspective of ongoing structural change and rebalancing in China, our findings can be interpreted as the result of a still very dominant industrial sector, and a previously export‐ and investment‐driven growth model. Tertiarization in China could be one way of increasing the economy's future resilience to external shocks. However, the future structure of both the industrial and service sectors may be very decisive.

The present paper follows publications which have investigated the influence of global liquidity developments on commodity prices and asset price indices. It contributes to the literature by analyzing how global developments in money, output, and inflation can be related to developments in gold prices in a long-run perspective. Applying a multivariate cointegration (CVAR) analysis, this study investigates long-run relationships between these variables. The results suggest a significant influence of excess global liquidity on real gold prices and a co-movement of real gold prices and global inflation.

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