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People’s Republic of China: 2011 Spillover Report—Selected Issues

Author(s):
International Monetary Fund
Published Date:
July 2011
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I. CHINA’S EVOLVING ROLE IN GLOBAL TRADE1

China’s export-oriented growth model has resulted in a large expansion of China’s trade and a rapid move up the value-added chain. This has had significant implications for the global supply chain: China’s reliance on processing trade, while large, is on a declining trend. From a network perspective, China is now the world’s most “central” trader, with the largest and most important connections to other major trading nations; it has become a dominant importer of commodities and exporter of capital goods and intermediate products. While China remains a key conduit for the transmission of real shocks, but three factors—its size, trade centrality, and shares of domestic demand and value added—mean that the impact of shocks originating in China is increasing.

1. Export-oriented growth. The export-oriented growth model—comprising in the main an exchange rate policy and supportive investment, financial, and trade policies—has resulted in a large expansion of exports. China’s share of exports has nearly quadrupled over the past 15 years, rising from around 3 percent in 1995 to about 12 percent in 2009; its share has doubled since WTO accession in 2002. The structure of exports has changed, with a rapid increase in the proportion of capital goods exported. At the same time, processing still accounts for nearly one half of China’s trade, which means that the standard trade figures overstate the economic impact of China trade, but its share is declining.

2. Increasing value added. China has been moving rapidly up the value-added chain (Figures 1 and 2). Its comparative advantage, as measured by its export share of a product group relative to the world, is increasingly in capital goods, alongside consumer goods. As a result, the share of intermediate inputs has declined.

Figure 1.China’s Trade Structure

Source: Comtrade; CEIC Data Ltd.

Figure 2.China’s Changing Trade Patterns

Source: Koopman et al. (2010), “Give Credit Where Credit is Due: Tracing Value Added in Global Production Chains,” NBER WP 16426

Note: DVA refers to DomesticValue Added, while FVA refers tointermediate Foreign Value Added.

3. Global supply chain. The growth and transformation of China’s trade has had important implications for the global and, in particular, the regional supply chain.

  • Commodities. China has moved from being a material supplier to a very large importer, with new links emerging (e.g., with Australia, Brazil, and Saudi Arabia).

  • Intermediate goods. The rise up the value chain is reflected in new and expanded markets for its intermediate good exports (e.g., in the region, U.S., and Euro Area).

  • Capital goods. China has expanded its market share for exports of capital goods. Its demand for capital goods is increasingly met within the region.

  • Consumption goods. As domestic consumption strengthens, important supply links are developing—from the Euro Area, Korea, Japan, and the U.S.

4. Central role. Applying metrics of centrality from network theory, China is found to be most central to the global trading system, surpassing even the U.S. and the Euro Area. This is a significant change from a decade ago. On final consumption and capital goods, China has become the most central, and also very central to intermediate goods trade.

Centrality in Global Exports

(Rank, with 1 being the most central; measured by eigenvector centrality 1/)

Total TradeCapital GoodsConsumption GoodsIntermediate GoodsRaw materials
2000200820002008200020082000200820002008
Australia161316181716131476
Brazil1512141515179985
China41511153910
Euro Area1233221168
Hong Kong, China17201313101817181718
India1915171614910101311
Indonesia141615149121213109
Japan341234441616
Korea, Rep.768576762020
Malaysia91198121115151514
Mexico6106768111123
New Zealand21211920212119191215
Philippines18181112182020201917
Russian Federation10818191376752
Saudi Arabia12921212019181711
Singapore11171011161416122121
Taiwan, China8746810881819
Thailand13141210111314161113
United Kingdom5579533547
United States2324452234
Vietnam20192017191521211412

Eigenvector centrality weighs the size of exports with linkages to other large players.

Eigenvector centrality weighs the size of exports with linkages to other large players.

5. Spillovers. China’s central role in global trade makes it an important conduit for the transmission—and increasingly a source—of shocks. Domestic demand is contributing a growing part of the value added of its trading partners (see Appendix I for a technical discussion). This contribution was small about a decade ago, reflecting the low import content of consumption, but it is currently estimated to be larger than Japan and the U.K., and smaller only when compared to the Euro Area and the U.S. As demonstrated during the financial crisis, China can attenuate the effects of global shocks down the supply chain. Its expanded domestic demand during the crisis raised imports for commodities and capital goods. However, its central role in trade also means that an adverse shock originating in China could have a much larger and wider impact than in the past.

Contributions of Countries’ Final Demand to Partners’ GDP

(Weightedaverage across major trading partners)

6. Rebalancing policies. Looking ahead, rebalancing growth in China toward domestic private consumption can have significant spillovers on the supply chain (see, for instance, Chapters II and VI). This increased demand would need to be measured against the impact of potentially reduced demand from the U.S. (owing to increased saving) and given the different sets of consumption goods imported by the Chinese and the Americans (Figure 3). Moreover, since China and the Asian region export a different set of consumption goods, changes in product mixes and/or consumer preferences would need to accompany such demand changes, if the impact of the changes is to extend beyond the Asian supply chain.

Figure 3.China Trade Direction and Similarity

Source: Comtrade; CEIC Data Ltd.

Appendix I. The Decomposition of Value Added

1. Input-output analysis. This appendix presents the details of the input-output analysis needed to calculate the contribution of China’s (and others’) domestic demand to the value added of partner countries. The analysis builds on Asian regional Input-Output tables for 2000 and 2008 from Mohommad and others (2010). These I-O tables show the detailed production structure for 10 economies—Indonesia, Malaysia, Philippines, Singapore, Thailand, China, Taiwan Province of China, Korea, Japan, and the U.S.—with 7 sectors in each economy.1

2. Production structure. Figure 1 summarizes the production structure of each economy, which comprises an intermediate demand block (the “A” matrix) and a final demand block (the “F” matrix). The A and F matrices show (reading down the column) the number of units of intermediate (in the A matrix) and final (F matrix) inputs required to produce one unit of output. The inputs include domestic and imported intermediate goods from upstream supplier, as well as final goods. The diagonal shaded blocks show the domestic goods for intermediate and final use.

Figure 1.Production Structure

3. Country coverage. To broaden country coverage, the following key economies were added to the selected ones above: Australia, Brazil, the Euro Area, Russia, India, Saudi Arabia, and the U.K. The I-O tables for these economies for 2008 were constructed using I-O tables for year 2000 published by the OECD and information on trade and output growth. This involved mainly the following 3 steps:

  • For each new country (and each in the Euro Area), a domestic input-output matrix is identified from the OECD input-output database. Typically, these were for the year 2000. For 2008, the value added inputs were updated using GDP data from the WEO database, and domestic intermediate input requirements were updated assuming a constant relation to value added.

  • Imports of intermediate and final goods were calculated using COMTRADE data based on the BEC classification. Raw materials and intermediate goods trade were assumed to feed into the production process at the intermediate level (matrix A), while trade in capital and consumption goods were taken to be for final use in each country (F matrix). Trade data were then used to complete the “off diagonal” blocks of the A and F matrices.

  • The domestic final demand was calculated as the residual from output net of intermediate use and exports in each economy to ensure consistency with the I-O framework presented in Figure 1.

4. Calculating spillovers. In the I-O framework, gross output (X) solves the following equation:

where B = (I- A)1 is the Leontief matrix. Each block) in this matrix shows the number of units of production in country i (supply country) to produce one unit of gross output in j, the demand country. The impact of final demand in economy j on other economies is determined through the following equation:

where v is a diagonal matrix of the vector of value added.

Prepared by Papa N’Diaye (APD) and Nathan Porter (SPR), with inputs from Jarkko Turunen (SPR).

Our use of COMTRADE HS classification data is in line with that by Mohommad, Adil, Papa N’Diaye, and Olaf Unteroberdoerster, “Does Asia Need Rebalancing?” Regional Economic Outlook: Asia and Pacific, April 2010, pp. 43-66 (International Monetary Fund: Washington, D.C.) and Pula, Gabor, and Tuomas Peltonen, 2009, “Has Emerging Asia Decoupled?” ECB Working Paper 993 (European Central Bank: Frankfurt).

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