As China’s economy has expanded its independence in intermediate goods, it will be difficult for South Korea to enjoy the same benefits as in the past, according to a report on China’s growth structure transition process and the ripple effects released by the Bank of Korea (BOK) on April 4. The report also asserts that Korea should expand its export items to China to include consumer goods and diversify its export markets.
China’s import volume coefficient (import volume/real GDP) has tapered off, according to the report. The import inducement coefficient, a measure of extents to which final demand including domestic consumption, investment and exports triggers imports, also shrank from 2017.
The report attributed the drops in the two coefficients to a drop in China’s imports of intermediate goods and a decrease in investment, which have a high import-inducing effect. Since 2010, the Chinese government has been emphasizing manufacturing growth and revitalizing domestic demand and exports through a series of initiatives such as “Made in China 2025” (2015) and “Dual Circulation Strategy” (2020). As part of these policies, the country has become more self-sufficient.
According to the report, China has increased funding for new growth driver industries such as artificial intelligence (AI), renewable energy, electric vehicles, and robotics, and has recently ramped up support for research and development (R&D) in advanced technologies and public AI. The country has recently emerged as the world’s largest automobile exporter, surpassing Germany and Japan, thanks to a boom in automobile exports behind electric vehicles, and maintains a high global market share in secondary batteries and solar power generation.
The growing vulnerability of the real estate sector has also accelerated the policy shift in China. Real estate has been a major growth driver for China’s economy since the 2000s, but it has become increasingly fragile due to sustained over-investment. In response, the country introduced the Three Red Lines (August) which manages companies’ debt, lending, and cash holdings since 2020, to reduce debt while promoting new growth drivers such as electric vehicles and secondary batteries to replace the real estate sector.
“After 2021, when real estate investment began to contract, the relationship between growth and import volume also deteriorated significantly compared to the past,” the report said, “This suggests that exports to China from neighboring countries, including Korea, may become smaller than in the past. It is also possible that the Korean economy will not be able to enjoy the same special benefits from exports to China as in the past.”
“In the future, China is expected to become more important as a consumer market,” the report said. “In order to respond to structural changes in the Chinese economy, the Korean economy needs to expand intermediate goods-oriented exports to China to consumer goods-oriented ones while boosting Korean export products’ competitiveness through technology development.”