Understanding the role of China's domestic market in the (unequal) growth of world economy

• Date: 01 August 2020
• Author: Sunghoon Chung
• Published date: 01 August 2020
• DOI: http://doi.org/10.1111/twec.12864

World Econ. 2020;43:2199–2221. wileyonlinelibrary.com/journal/twec

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2199

© 2019 John Wiley & Sons Ltd

Received: 16 May 2018

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Revised: 22 April 2019

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Accepted: 25 April 2019

DOI: 10.1111/twec.12864

ORIGINAL ARTICLE

Understanding the role of China's domestic market

in the (unequal) growth of world economy

SunghoonChung

Korea Development Institute (KDI), Sejong, Korea

KEYWORDS

Asian growth, China's domestic market, global value chain, structural change

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INTRODUCTION

China's rapid growth and its global impact have been a major topic for economic researchers. The

typical approach in the literature on this topic has been to regard China as a ‘world factory’, reflecting

its massive output tightly linked to international trade and investment. Accordingly, findings from the

literature are mostly about the effect of market competition from China. Autor, Dorn, and Hanson

(2013), for example, find that a sustained flood of Chinese imports into the US explains one quarter

of the 1990–2007 job losses in the US manufacturing sector. Bloom, Draca, and Reenen (2016) inves-

tigate how European firms respond to massive inflows of Chinese goods and find a heightened ten-

dency to innovate to survive. Similar studies have been conducted for different countries/regions by

treating China as a formidable producer and competitor.1

This paper takes a different approach: we examine the mounting influence of China on the world

as a final consumer. Specifically, we evaluate the role of the Chinese market in the growth of other

countries from 1995 through 2011 with special attention on the last 3years, when the global finan-

cial crisis and subsequent recovery occurred. The 2009–11 period is particularly applicable to our

approach because it is when China adopted a radical fiscal stimulus package in hopes of boosting

domestic demand enough to offset negative foreign demand shock. The stimulus, adopted at the end of

2008, contributed to 11.9% domestic spending growth on average during the 3years and helped China

become the second‐largest market in 2010. Despite its rising stature, the global impact of Chinese

domestic market has been surprisingly unexplored in the literature.

To assess China's role as a final consumer, we employ the input‐output accounting framework

proposed by Bems, Johnson, and Yi (2010) and Bems, Johnson, and Yi (2011), which was used to

explain the great trade collapse during the global financial crisis. The core underlying mechanism of

the collapse in the framework was strong vertical production linkages across countries. In particular,

1 Related recent studies include Acemoglu, Akcigit and Kerr (2016), Acemoglu, Autor, Dorn, Hanson and Price et al. (2016)

and Pierce and Schott (2016) for the US, Iacovone, Rauch and Winters (2013) and Utar and Ruiz (2013) for Mexico, Mion

and Zhu (2013) for Belgium, Utar (2014) for Norway, Eichengreen, Rhee and Tong (2007) for Asian countries, and Hanson

and Robertson (2010) for developing countries.

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CHUNG

plunging demand for durable goods during the crisis compounded.2 The negative shock from the top-

pled durable goods demand permeated all the production stages along GVCs and trade among GVCs

plummeted sequentially. This transmission mechanism appeared similarly for production and value‐

added. Thus, we apply the framework to estimate the linkage between the change in China's domestic

spending and GDP growth in foreign countries.

We then examine two structural changes in China over the 1995–2011 period that are key to under-

standing the role of its domestic market to the rest of the world. The first change is unequal increases in

final expenditure. We show that the rapid expansion of Chinese market over the period is largely due to

spending on durable goods. Thanks to the government stimulus, durable expenditures remained high in

China even during the financial crisis. The second change involves the content of imports for production.

As the Chinese economy gradually integrated into the global production network, imported intermediate

inputs become less embedded in the production of exports and used more in goods for the domestic

market in recent years. These two structural changes can reinforce each other magnifying the overall

influence of Chinese market on the world economy, although the magnitude of the influence may depend

on the degree of production integration—notably through durables—with China.

All our estimates consistently confirm the arguments above. Using the Inter‐Country Input‐Output

Tables from the OECD, we compute the country‐level elasticity of GDP with respect to spending in

China and show that one per cent growth in Chinese demand by product category (i.e., nondurable, dura-

ble, utilities and construction, and services) induces higher GDP growth across all countries in 2010 than

it did in 1995. However, the size of the elasticity varies substantially among the product categories: de-

mand for durables has a much greater impact than others. These heterogeneous elasticities are combined

with the unevenly high expenditure growth in China to induce GDP growth in foreign countries, but

disproportionately more in its neighbouring countries and sectors related to durable goods production.

Specifically, the induced increases in annual GDP growth rate in 2009–11 are nearly 1 percentage point

in Taiwan, Malaysia and Korea but less than 0.1 percentage point in the NAFTA and EU countries. We

also find that the sustained market expansion in China absorbed a significant portion of negative growth

in many countries (even outside Asia) in 2009 and helped their recoveries in subsequent years.

The rest of the paper is organised as follows. The next section introduces the related literature

and addresses our contribution. Section 3 explains our analytical framework and data for estimation.

Section 4 highlights the two aspects of structural change in China. Estimation results are reported and

discussed in Section 5 with policy implications. Section 6 concludes.

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THE RELATED LITERATURE

This paper contributes to the literature on China's global impact. Interested readers may start with, for

example, Qiu and Zhan (2016), who classify and review the relevant studies by the group of affected

countries and type of markets. As mentioned, however, most studies in the review emphasise the im-

pact of China as a massive producer. Our contribution is to examine China's demand as the channel of

its impact rather than its supply.3

Few studies share our viewpoint. An exception is Costa, Garred, and Pessoa (2016) who investigate

the effect of the increasing commodity exports to China on the Brazilian labour market. We extend their

2 Throughout the paper, demand and expenditure mean final demand and final expenditure, respectively, unless specified

otherwise.

3 Some papers consider both the demand and supply sides in a single framework (e.g., Eichengreen et al., 2007; di Giovanni,

Levchenko and Zhang, 2014; Hsieh and Ossa, 2016).