the role of china in asia: engine, conduit, or steamroller?

The Role of China in Asia:Engine, Conduit, or Steamroller?

Jane Haltmaier, Shaghil Ahmed, Brahima Coulibaly, Ross Knippenberg, Sylvain Leduc, Mario Marazzi, Beth Anne

Wilson

Federal Reserve Board

Presentation at World BankNovember 14, 2007, Washington DC

2

The Role of China: Engine, Conduit, or Steamroller?

The views in this presentation are the responsibility of the presenter and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve System.

3


China: Challenges and Opportunities

Possible Responses for other countries:

Rely more on domestic demand

Seek out consumer markets in China

Integrate production with China

Look for ways to reduce competition with China

China's Share of Exports

0

2

4

6

8

10

12

1990 1994 1998 2002 2006

Percent

To the World

To the United States

4


What Is China’s Role or Roles in Asia?

Neutral?

Independent engine of growth?

Conduit of industrial country demand?

Competitor for other Asia producers?

Emerging Asian* Exports by Destination

0

10

20

30

40

50

60

1990 1994 1998 2002 2006

Percent

Share to Industrial Countries

Share to China

5


Paper provides evidence on Regional dependence on net exports

=> not all countries are equally dependent Regional macroeconomic linkages

=> Some hints that China is becoming an engine

Micro trade flows=> China’s role as conduit is sizable, increasing, and previously underestimated => Signs that China is displacing some production but countries are adjusting

6


How dependent is the region on net exports?

Percentage Point Contribution of Real Net Exports to Growth

0.0

1.0

2.0

3.0

4.0

5.0

6.0

China Japan India HongKong Taiwan Korea Singapore Indonesia Malaysia Philippines Thailand

Percent

1995-2000 2000-2006

7

The Role of China: Engine, Conduit, or Steamroller?Macroeconomic Linkages I: Growth ComovementsWith the U.S. and China using rolling regressions

Thailand Malaysia

-4

-3

-2

-1

0

1

2

3

1980 1984 1988 1992 1996 2000 2004

China

-4

-3

-2

-1

0

1

2

3

1980 1984 1988 1992 1996 2000 2004

United States

-4

-3

-2

-1

0

1

2

3

1980 1984 1988 1992 1996 2000 2004

United States

-4

-3

-2

-1

0

1

2

3

1980 1984 1988 1992 1996 2000 2004

China

8


Link with China has increased while link with U.S. has increased in some cases and decreased in others

Korea Taiwan

-4

-3

-2

-1

0

1

2

3

1980 1984 1988 1992 1996 2000 2004

China

-4

-3

-2

-1

0

1

2

3

1980 1984 1988 1992 1996 2000 2004

United States

-4

-3

-2

-1

0

1

2

3

1980 1984 1988 1992 1996 2000 2004

China

-4

-3

-2

-1

0

1

2

3

1980 1984 1988 1992 1996 2000 2004

United States

9


Macroeconomic Linkages II: VAR

Estimate a 3-variable structural VAR for several Asian economies (1993:2-2006:4) Real exports to United States Real exports to China/Hong Kong Domestic real GDP growth

System is block-recursive with the first two variables being exogenous to the third, based on SOE assumption

Exports to U.S. come before exports to China in contemporaneous causal ordering

10


Impulse Responses

Response of domestic output to one std. dev. shock to

Exports to U.S. Exports to China SINGAPORE

-4

-1

2

5

8

0 1 2 3 4Per

cen

t

SINGAPORE

-4

-1

2

5

8

0 1 2 3 4

THAILAND

-2

0

2

4

6

0 1 2 3 4

Horizon (quarters)

Per

cen

t

THAILAND

-2

0

2

4

6

0 1 2 3 4

Horizon (quarters)

11


Response of domestic output to one std. dev. shock to

Exports to U.S. Exports to China

MALAYSIA

-3

2

7

0 1 2 3 4

Horizon (quarters)

Per

cen

t

MALAYSIA

-5-3-11357

0 1 2 3 4

Horizon (quarters)

PHILIPPINES

-3

-2

-1

0

1

2

0 1 2 3 4

Per

cen

t

PHILIPPINES

-3

-2

-1

0

1

2

0 1 2 3 4

12


Variance Decompositions

U.S. demand shocks important for nearly all countries Chinese demand shocks almost as or more important

in some economies (KO, SI, TA, TH)

Exports to U.S. Exports to China OtherKorea 26.0** 24.2** 49.8**

Singapore 24.4** 21.2** 54.4**

Taiwan 12.3* 31.3** 56.4**

Indonesia 14.1** 7.6 78.3**

Malaysia 20.4** 8.9 70.6**

Philippines 14.9* 8.8 76.3**

Thailand 13.3* 17.3** 69.4**

*, ** indicate significance at the 10 and 5 percent levels, respectively.

Percent of 4-quarter ahead forecast error variance of domestic output growth explained by:

Shock to

13


Micro Trade Flows I: Relative Importance of MPC Trade

Trade in finished goods v. parts and components (MPC)

At 5-digit level, break down trade in SITC codes 0-8 into Basic products, i.e., natural resources and

building materials (BP) Manufactured parts and components (MPC) Manufactured finished goods (MFG)

More exhaustive coverage than previous work Athukorala (2003), Athukorala/Yamashita (2006)

only consider machinery and transport (SITC 7) and miscellaneous manufacturing items (SITC 8)

14


Previous studies underestimated product fragmentation (20-30%)

Broader definition leads to a better estimate of importance of P&C in trade

Share of Parts and Components in Manufactured Exports by 1-Digit SITC Code, 2005 (percentage points)

Chemicals & Related

Products, n.e.s.

Manuf. Goods

Machines, transport

equipment

Misc. Manuf. articles

Total

SITC (5) (6) (7) (8) Asia 59.8 70.6 52.0 7.2 46.5 China/HK 53.6 56.5 41.2 3.0 31.9 Other Asia 59.4 76.2 52.8 13.5 51.0 Rest of World 39.7 70.7 46.0 9.2 42.2

15


Results highlight China’s role as a conduit 68 percent of the region’s exports to China are MPC compared with less than half to the ROW

Parts and Components as a Percent of Exports of Manufactured Goods

0

10

20

30

40

50

60

70

80

90

Japan India Taiwan Korea Singapore Malaysia Thailand Philippines Indonesia RegionalAverage

Trade with China Trade with Rest of World

16


Comparing the proportion of parts and components in exports with that of imports further highlights China’s role as assembler

Difference is largest for China, but sizable for some others, notably Philippines, Malaysia, and Thailand

Parts and Components as a Percent of Trade in Manufactured Goods

0

10

20

30

40

50

60

70

80

90

Japan India Taiwan Korea Singapore Malaysia Thailand Philippines Indonesia China/HK

Exports Imports

17


China’s role as a conduit is also evident in trade balances

Other Asia’s trade surplus with China is nearly all in MPC Accounts for nearly all of trade surplus; trade with ROW

is near balance, with large MFG surplus and BP deficit In contrast, China has a large surplus with ROW, mostly

in MFG, as well as a large deficit in BP.

2005 Asian Trade Balances (TB)

-350.0

-250.0

-150.0

-50.0

50.0

150.0

250.0

350.0

Total

MFG

MPC

BP

Other Asia's TB with China

Other Asia's TB with ROW

China's TB with ROW

18


Trade Patterns Vary Widely by Country

Surplus with China is mostly in the NIES

Most of MPC surplus (the conduit role) is in NIES and Japan

The NIES also have a surplus in MFG (possible incipient engine role?)

Pattern of trade with ROW generally different than with China

MFG trade more important; except for Japan, MPC less

2005 Trade Balances (TB) with China

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Total

MFG

MPC

BP

Japan

NIEs

ASEAN-4

India

2005 Trade Balances (TB) with ROW

-200.0

-150.0

-100.0

-50.0

0.0

50.0

100.0

150.0

200.0

Total

MFG

MPC

BP

Japan

NIEs

ASEAN-4

India

19


Micro Trade Flows II: Changes by Technological Category

Between 1995 and 2005 China increased its share of Asian exports in all categories,

How have other countries responded?

China's Share of Asian Exports by Technological Category

0

10

20

30

40

50

60

1995

2005

PrimaryProducts

Agric.ResourceBased Manu. Other

ResourceBasedManu.

Low techTextiles

OtherLow tech

Mediumtech auto

Mediumtechchemical

Mediumtechengineering

ElectronicHigh tech

OtherHigh tech

20


Revealed Comparative Advantage

China has RCA above 1 in only 2 categories, low-tech textiles and electronic high-tech

Has fallen in low-tech, while rising in electronic high-tech (EHT)

Hong Kong has similar areas of specialization

China

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1995

2005

PrimaryProducts

Agric.ResourceBasedManu. Other

ResourceBasedManu.

Low techTextiles

Otherlow-tech

Mediumtech auto

Mediumtechchemical


Electronichigh tech

Otherhigh tech

Hong Kong

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

PP RB1 RB2 LT1 LT2 MT1 MT2 MT3 LT1 LT2

1995

2005

PrimaryProducts

Agric.ResourceBasedManu.

OtherResourceBasedManu.

Low techTextiles

Otherlow-tech

Mediumtech auto

Mediumtechchemical


Electronichigh tech

Otherhigh tech

21


Other advanced economies have increased RCA in at least one area where China is not dominant, while maintaining high RCS in EHT

Taiwan

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5


1995

2005

PrimaryProducts



Low techTextiles

Otherlow-tech

Mediumtech auto

Mediumtechchemical


Electronichigh tech

Otherhigh tech

Korea

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5


1995

2005

PrimaryProducts



Low techTextiles

Otherlow-tech

Mediumtech auto

Mediumtechchemical


Electronichigh tech

Otherhigh tech

Japan

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5


1995

2005

PrimaryProducts



Low techTextiles

Otherlow-tech

Mediumtech auto

Mediumtechchemical


Electronichigh tech

Otherhigh tech

Singapore

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5


1995

2005

PrimaryProducts



Low techTextiles

Otherlow-tech

Mediumtech auto

Mediumtechchemical


Electronichigh tech

Otherhigh tech

22


Philiippines

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5


1995

2005

PrimaryProducts



Low techTextiles

Otherlow-tech Medium

tech autoMediumtechchemical


Electronichigh tech

Otherhigh tech

Other countries also have high RCAs in EHT

Philippines has the highest RCA in EHT in the region

Thailand’s RCA in medium-tech and agric. resource-based and Malaysia’s RCA in primary products have risen,

but EHT RCA is still highest

Thailand

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5


1995

2005

PrimaryProducts



Low techTextiles

Otherlow-tech

Mediumtech auto

Mediumtechchemical


Electronichigh tech

Otherhigh tech

Malaysia

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5


1995

2005

PrimaryProducts



Low techTextiles

Otherlow-tech

Mediumtech auto

Mediumtechchemical


Electronichigh tech

Otherhigh tech

23


Exports of both India and Indonesia are at the lower end of the technological scale, although they both compete with China in low-tech textiles

Indonesia

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5


1995

2005

PrimaryProducts



Low techTextiles

Otherlow-tech

Mediumtech auto

Mediumtechchemical


Electronichigh tech

Otherhigh tech

Indonesia

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5


1995

2005

PrimaryProducts



Low techTextiles

Otherlow-tech

Mediumtech auto

Mediumtechchemical


Electronichigh tech

Otherhigh tech

24


In sum, responses of RCA to China’sincreased presence have varied widely

Both EHT as well as low-tech textiles remain important to a number of other countries

But has also been shift to areas where China is less dominant, particularly for more-advanced economies

Next step is to better quantify extent to which China has contributed to observed changes in RCAs

25


Micro Trade Flows III: Trade Displacement

Is China displacing the exports of other Asian economies? Estimate regression by product category by

country: regress export growth on China’s world export share (a proxy for competition), Vp

A negative and significant α3 would suggest displacement

ptptptttpt VXyearX 1312101 lnln

26


Rise in China’s export share appears to negatively affect other countries’ exports, mainly for low- and medium-tech goods

Does not necessarily mean these countries are losing out, on net

Consistent with more cooperation in high-tech

Sector India Indonesia Japan Malaysia Philippines Korea Singapore Taiwan Thailand

Total -0.16** 0.04 -0.23** -0.25** 0.10 -0.37** -0.18** -0.28** 0.05HT1 (Electronics and Electrical) -0.20 -0.08 -0.12 0.03 0.08 -0.16 0.02 -0.16 -0.18HT2 (Other High-Tech) -0.02 -0.50 -0.24 -0.42** -0.02 -0.32 -0.09 -0.04 -1.02**

MT1 (Automotive) 0.15 0.96* -0.45** -0.12 0.34 -0.43* -0.76 0.71 0.04MT2 (Chemicals and Basic Metals) -0.32** -0.51** -0.10 -0.45** 0.01 -0.51** -0.35** -0.27** -0.11MT3 (Engineering Products) -0.29** -0.23** -0.18** -0.13** -0.53** -0.35** -0.08 -0.21** -0.04LT1 (Textile, Garment and Footwear) 0.09 0.42** -0.02 -0.19 0.18 n.a. 0.24** n.a. n.a.LT2 (Other Low-Tech Manuf.) -0.23** 0.06 -0.20** -0.20** -0.02 -0.38** -0.17** -0.35** 0.02Annual data from 1990 through 2005. n.a. indicates no coefficient due to insufficient data.

*, ** indicate significance at the 10 and 5 percent levels, respectively.

Year-dummy coefficients were all negative and significant. Adjusted-R2 generally varied between 0.03 and 0.20.

Estimates of Effect of Chinese Competition (α3)

(Percentage points)

27


Conclusions China’s rise as an economic power offers both

opportunities and challenges to its neighbors External demand remains an important source of

growth for the region, although more important lately for more-advanced economies (NIES and Japan) than for others

Macro evidence hints that China’s role as an engine of growth is rising

However, micro evidence suggests that China is still more of a conduit, especially for the more-advanced

As China has moved up the value chain, there have been shifts in production

However, analysis of product displacement suggests a negative effect of China in low and medium-tech industries, not in high-tech

the role of china in asia: engine, conduit, or steamroller?

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