The growth of the Chinese domestic market, in terms of final domestic demand, is an important factor influencing Korea's economic growth. With the progress of so-called “servicification” in the Chinese economy, the influence of Chinese domestic growth on Korean economic growth has decreased to some extent, but the Chinese domestic market still remains important to Korea.
On the other hand, as the conflict between the United States and China intensifies in various fields, it has become difficult for Korea to openly publicize strategic economic cooperation or cooperation projects with China as before, as it must balance its traditional focus on the US from a security standpoint and on China in economic aspects. In particular, the Biden administration will further systematize anti-China solidarity centered on allies, and in response to this, China's willingness to cooperate with neighboring countries is expected to grow. In the meantime, there is a concern that the scope of Korea's operations in the area of foreign cooperation will further narrow.
In this situation, Korea needs to promote economic cooperation with China, centered on regional cooperation, that can minimize the impact of unstable global governance. This is because it will be possible to promote cooperation at each regional level even in the midst of the US-China conflict, and this form of cooperation is much more flexible and practically accessible than cooperation between countries. Companies and associations in the US and Japan are maintaining and expanding cooperation with local governments, including participation in Chinese local government projects, even in the face of poor relations between their countries and China.
Deciding that the conflict with the US would be prolonged regardless of the results of the US presidential election, in October 2020 China proposed the strategy of “Dual Circulation” as a key economic policy direction up to 2035. This is a mid- to long-term strategy to increase economic independence by expanding the industrial and supply chains in the region and improving the efficiency of economic cycles in the face of increasing external uncertainty. As China is emphasizing the elimination of inefficiencies in domestic demand during the period of the 14th Five-Year Plan (FYP), when the Dual Circulation strategy will be implemented in earnest, China's regional economic and industrial cooperation is expected to become more active than before. Accordingly, participation in the domestic market through expanding economic cooperation with the Chinese region will become more important.
As such, although the development of China's domestic market is expected to intensify and our demand for cooperation in the regional domestic market is expected to further expand, most of the existing studies on the Chinese domestic market mainly analyze the consumption and import markets. Recognizing this gap, this study expanded the scope of analysis of the domestic market in China to the entire domestic final demand, and analyzed inter-regional trade relations and other economic relations based on the Inter-Regional Input Output analysis.
This study analyzed the domestic market in China from various angles. First, an in-depth analysis of China's long-term domestic demand expansion policy was conducted, and changes in the regional structure of the domestic market were analyzed through the Inter-Regional Input Output analysis, which has rarely been attempted in analyses of the Chinese domestic market. In addition, the changes in the regional structure of the Chinese import market and Korea's competitiveness were analyzed using Chinese trade statistics. In particular, by synthesizing the changes after the global financial crisis, a turning point in China's economic structure, we project future changes in the regional structure of China, which emphasizes independence in the domestic economy. In addition, in the era of US-China conflict, the study aimed to select regional markets meaningful to Korea, and to present strategic directions toward China focusing on regional cooperation and approaches into the domestic market.
Chapter 2 analyzes the changes in China's economic structure after the global financial crisis in terms of industrial structure, trade structure, and competition structure in the Chinese import market.
Chapter 3 analyzes changes in China's strategy to expand domestic demand by period and region, and reviews the directions of the 14th FYP and mid- to long-term strategies in the area of domestic market policy. China has maintained rapid growth by participating in global value chains based on its low factor costs and export-led strategy after reform and opening, as a result of which its trade dependence climbed to 60% in the mid-2000s. However, following the 2008 global financial crisis the Chinese economy reinforced strategies to expand domestic demand. Immediately after the global financial crisis, domestic demand was boosted mainly by infrastructure investment, but with the advent of the New Normal era accompanied by structural changes in the economy, consumption-oriented policies to expand domestic demand have gained strength. Since then, the domestic policy has shifted toward qualitative improvement while promoting restructuring to improve economic inefficiencies and imbalances caused by excessive investments. However, facing an unprecedented decline in the growth rate due to the COVID-19 shock, the strategy to expand domestic demand is gaining momentum again, and the 14th FYP looks to promote domestic demand expansion in a new direction that combines the quantitative expansion of domestic demand and qualitative enhancement strategies at the same time. By region, the eastern region has accounted for a vast majority of China's domestic demand over the past 20 years and maintains a significant position in the consumption sector. On the other hand, in the investment sector, the status of the western region has elevated mostly due to infrastructure investment and the central region based on manufacturing investment. These changes are closely related to China's regional balanced development policy. The central and western regions have been utilized as strategic areas for investment expansion, and the eastern regions as leading regions of qualitative growth such as high-tech industries and service industries. Even during the period of the 14th FYP, it is predicted that the strategy of having the eastern region lead the digitalization and “smartization” of the economy will continue.
In Chapter 4, based on China's inter-regional input output table, changes in the regional structure of the Chinese domestic market were analyzed through changes in domestic items and industry structure, changes in the share of imports inherent in domestic import demand, and changes in trade relations between regions. In particular, trade relations between regions were examined in terms of trade in products, movement of imported intermediate goods between regions, and trade based on value-added (TiVA). Following the global financial crisis (GFC), domestic demand in China expanded, centered on investment demand in the central and western regions. In addition, the proportion of imported goods in China's inherent in domestic demand decreased, mainly due to the decrease in the proportion of imported intermediate goods. Just as domestic demand expanded mainly for investment, imports for investment exceeded that for consumption, but imports of final goods for consumption showed the highest growth rate in the post-GFC period.
The share of trade between regions in China decreased to about 29% compared to pre-GFC levels, signifying that the share of regions satisfying final demand with their own products has increased. After the GFC, the production inducement effect on each region's final demand increased for its own region and decreased for other regions. This means that just as the dependence on domestic demand of countries around the world increased compared to trade dependence after the GFC, the dependence on regional demand between Chinese regions also increased. In the process of decreasing the share of trade between regions after the GFC, the share of output from the midwest region in particular increased and the share of input from Huadong and Huanan areas decreased. This is mainly related to the increase in investment demand in the Chinese Midwest and the contraction of production activities in Huanan and Huadong, where GVC participation is high. Inter-regional trade moves the imported intermediate goods embedded in the trade products to other regions. When we identified the import base of intermediate goods based on the region from which intermediate goods were directly imported, the proportion of the eastern region exceeded 80%. Compared to the eastern region's proportion of imported intermediate goods embedded in domestic demand of about 70%, intermediate goods imported from the eastern region are be produced to the midwest region through regional production activities. This means that in Korea's export of intermediate goods to China, it is necessary to pay more attention to the changes in the base regions for importing intermediate goods than the changes in final demand in each region. Lastly, the characteristics of interregional value-added trade (TiVA) show that the Midwest has a large input of value-added, but the scale of output is even larger, resulting in a negative net input. This is mainly due to differences in trade items. Based on its production networks, the eastern region mainly accounted for production in the manufacturing industry and high-end service industry-related items sent to the midwest region, while the midwest region mainly produced subsistence resource-related items in the areas of mining, agriculture, forestry and fishery, food and beverage manufacturing. This resulted in an increase in added value-added net input in the eastern region. In other words, domestic demand expanded after the GFC, centered on the investment demand in the midwest region, but added value net input increased in the eastern region and decreased in the Midwest.
Chapter 5 uses China's trade data to classify the structure of the import market by processing stage and industry, to identify changes and causes of regional structure. In addition, the competitive relationship between Korea and major countries in the import market was analyzed using the Market Comparative Advantage (MCA) Index. After the GFC, the import market in China showed a tendency to diversify. Although the eastern region is still in the top ranks, the proportion of other regions such as the western region increased after the crisis (Sichuan, Chongqing, Henan, etc.), and the eastern region also showed signs of diverging to Shandong and Hebei. On the other hand, China's import market for Korean products became more concentrated in traditional top-importing provinces such as Guangdong and Jiangsu, while among other eastern regions Shandong, Tianjin, and Beijing fell significantly after the GFC in terms of their proportion of Korean imports. This is mainly due to the withdrawal of local investment and production decline by Korean companies due to overheated competition in China and rising production costs. Meanwhile, among items such as medical supplies, cosmetics, semiconductors, and automobiles, which are promising import items in the Chinese market, medical supplies and cosmetics are likely to continue to increase in the future due to improved income levels, a preference for imported products, and easing of import restrictions in China. In addition, semiconductor imports are greatly affected by non-economic factors such as the US-China conflict, and competition may intensify in the long run as they are seen as a top priority import replacement item. Among these items, Korea's exports to China accounted for a higher proportion in the area of medical devices than pharmaceuticals among medical supplies and a higher proportion of parts than finished automobile products. In addition, Korean products were more favored in the area of cosmetics imports in Shandong and Henan, and in pharmaceutical imports in Tianjin and other regions. Meanwhile, imports of semiconductors and automobiles were greatly influenced by Korean companies' entry into China.
The results of our analysis of changes in the competitive structure of China's import market showed a decline in the total share of the import market in the five major countries of Korea, Taiwan, Japan, the United States, and Germany. Of these, only Germany increased its share after the GFC. Japan's share fell the most, while Korea's share of semi-finished products declined, but that of parts and parts rose. In addition, while the market share in the capital and consumer goods market fell, the share of food and beverage semi-finished products, durable goods, semi-durable goods and non-durable goods among specific consumer goods increased. Industries in which Korea showed an increase in market share were non-metallic mineral products, general/special equipment, electronics/computers/communication equipment, electric machinery, and agriculture. In these industries, Japan and Taiwan had a comparative advance in non-metallic mineral products, and Japan, Germany and the United States in general and special facilities, indicating that Korea’s competition with these countries may intensify. As for the area of electronics/ computers/communication equipment, Korea and Taiwan both have industries with competitive advantages, and both are rising in their market share, meaning that competition with Taiwan can be expected to become more intense. Among major promising import items, medical supplies maintain their share and comparative advantage in advanced countries such as Germany and the United States. However, due to the characteristics of medical supplies, which require the accumulation of specialized technology, each specific item has a different competitive structure. In particular, in the import market for dental implants, Korea's market share and comparative advantage have increased significantly. In the case of cosmetics, Korea's market share has increased rapidly since 2014. In addition, the share of semiconductors in Taiwan and Korea exceeded 50%, while Taiwan's share and comparative advantage continued to rise and Korea's share fell slightly. In automobiles, Korea's share of both finished cars and parts fell and comparative advantage was lost in this sector.
In Chapter 6, based on the above analyses, the characteristics of China's domestic demand expansion strategy and regional economic structure change were synthesized into new models and forecasts produced for the 14th FYP period. In addition, strategies to enter the Chinese domestic market were presented by dividing them into strategic directions, selection of promising regions and industries for cooperation by sector, and formulation of new cooperation models. First of all, it was proposed to strengthen regional economic cooperation to minimize the impact of unstable global governance as a strategy for entering the domestic market in China in the era of US-China conflict.
Next, promising regions and industries for cooperation were selected for each field related to domestic demand expansion. First, investments in transportation and energy infrastructure and new infrastructure are the initial engines for domestic demand expansion, and cooperation should be expanded in the western and eastern regions, respectively. In particular, in the area of transportation and energy infrastructure, industries such as construction, machinery facilities, transportation facilities, and shale gas development are promising. In the new infrastructure area, industries such as 5G technology, electronics/communication facilities/parts, and digital/ information technology services are promising. Second, investments related to strategic new industries, which are emphasized along with infrastructure investment in the 14th FYP, are expected to be concentrated in cluster locations designated and managed by the central government. The eastern region (Guangdong, Beijing, Shanghai, Jiangsu, Shandong, etc.), where next-generation information technology, advanced equipment, new materials, biopharmaceuticals, and clusters related to environmental protection and energy saving are concentrated, and some central and northeast regions (Hubei, Anhui, Henan, Shanxi, Sichuan, Liaoning, etc.) need to promote cooperation in new industries. Third, expansion of final consumer goods exports and entry into the domestic consumption market through the use of new consumption models should be promoted around the eastern region. As demand for non-face-to-face consumption increases rapidly with COVID-19, development of the consumption market through new consumption models such as online and offline consumption convergence is being urged. In addition, in the process of expanding domestic demand, imports of intermediate goods for investment have slowed, while imports of final consumer goods continue to increase. This trend is expected to continue due to improved income and consumption levels and policy factors. Focusing on promising items where Korea possesses high market share and comparative advantage, such as medical supplies and cosmetics, there is a need to enhance competitiveness and expand entry regions by incorporating new consumption methods. In particular, as the online retail market is concentrated in Huadong and Huanan areas such as Guangdong, Zhejiang, Shanghai, and Jiangsu, and the import of final goods is also concentrated in these regions, these can be used as an entry base into the consumer market. In addition, it is necessary to consider entering the consumption market in some inland areas where the growth of online shopping, education, remote medical care, culture, and leisure services is rapidly growing, as well as pilot zones where tax reductions and license exemptions are applied to some consumer goods.
Finally, new cooperation models include cooperation using China's key regional development strategies, expansion of service convergence based on technological superiority, expansion of participation in China's domestic value chain, and open application of China's domestic system to Korea- China FTA service and investment agreements.