China is at crossroad – According to Digital Model Analysis

According to the Digital Model Analysis based on Penn World Table, which compared the status of civilization progress by comparing the detailed economic data between China and South Korea, there’re lots of phenomenon indicating that . China is at the crossroad of transformation of society.  

Penn World Table is dedicated to grasp the general trend of economy based on the concrete details of economic data and trade statistics of various countries.  Those detailed data may help people find some general trend of development in macro-economy activities through the digitalized system of analysis.  Below is a detailed comparison between China and Korea in the aspects of trade and economy.

I.Per Capita Income Gap

As mentioned above, data from the Penn World Table are used in calculating the income gap. The Penn World Table calculates the real GDP per capita of various countries in international dollars(I$) using 2005 as the base year. According to this analysis, the 1990 per capita income of China resembles the 1963 per capita income of Korea most. Therefore, there was a 27-year gap in terms of per capita income as of 1990. This income gap has been narrowed ever since. As of 2007, there was a 21-year gap between the income levels of the two countries, as shown in Table 1. In estimating and comparing income levels across countries and years, statistical error can arise due to inaccurate growth rate estimates and purchasing power disparities. Therefore, it is more important to find out the general trend of estimation rather to take the estimated numbers seriously.

<Table 1> Real GDP per capita of China and Korea

(unit: I$, 2005 constant prices)

Note: * China Version 2 data are used. This is based on recent modifications of the official growth rate.

Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.3, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, August 2009. (http://pwt.econ.upenn.edu/).

In order to verify the above estimation, let us estimate the income gap using data from the IMF. IMF publishes time series data of GDP per capita at current and constant prices as well as purchasing power parity(ppp) conversion rate of each country from 1980. Using these database, we can estimate the income gap between China and Korea. First, we can convert the Chinese GDP per capita at current price in yuan into Korean won using ppp conversion rates of two countries. For example, the Chinese GDP per capita at current price in 2010 was 29,669 yuan. Based on ppp conversion rates of two countries, 29,669 yuan in 2010 is as valuable as 5,998,777 won. In order to convert it into real GDP per capita, we use GDP deflator of Korea(base year=2005). Then, 5,998,777 won at 2010 current price is as valuable as 5,360,166 won at 2005 constant price. It implies that the Chinese GDP per capita in 2010 is as valuable as 5,360,166 won in real term when we consider ppp of two countries. In this case, the 2010 per capita GDP of China resembles the 1985 per capita income of Korea most. Therefore, we can conclude that there exists 25-years time gap in term of income level between two countries as of 2010. When we apply the same method, we can also find that the 2007 per capita GDP of China resembles the 1981 per capita income of Korea most. It implies that there was 26-year time gap as of 2007, which is slightly different from the results of Table 1. Even though the estimation of time gap in terms of income level is different from Table 1, we could still find that China has narrowed its income gap with Korea between 2007 and 2010.

Another way to verify the income gap is to compare proxy variables that reflect income level. One such variable would be the enrollment rate at the tertiary school. As both Korea and China have been eager to increase the enrollment rate at the higher education as their income level increases, there would be a close relationship between income level and the enrollment rate at the tertiary school. According to World Bank, the 2009 tertiary school enrollment rate of China was 24.5%, which was close to the 1983 tertiary school enrollment rate of Korea. Therefore, we can also conclude that there exists 26-year time gap between two countries, which coincides with the above estimation.

Another proxy variable can be the ratio of agriculture to GDP in terms of value-added. As income increases and industrialization proceeds, this ratio would fall both in Korea and China. According to the World Bank, the 2009 agriculture value-added/GDP ratio in China was 10.3%, which was close to the 1989 ratio of Korea.

From the above estimations, we can conclude that as of 2009 and 2010, there exists roughly 20- to 25-year time gap in terms of income between Korea and China.

As shown in Table 1, China has narrowed the income gap with Korea gradually but continuously since 1990. Considering the fact that the annual average growth rate of Korea has slowed significantly since the mid-1990s, the rate at which China closes this gap in terms of per capita income with Korea is likely to accelerate in the near future.

One important feature of the Chinese economy in terms of income is that there exists considerable regional disparities. For example, Fleisher, Li, and Zhao(2010) and Pan and He(2010) analyzed regional inequality in terms of human capital and social capital. Hence, it would be possible that per capita income levels in some regions of China lag far behind the average level of Korea, when residents in some Chinese cities would be almost as wealthy as the average Korean. For example, the GRP(gross regional product) per capita of Beijing in 2007 was 57,277 yuan when the nationwide GDP per capita was 18,934 yuan.

On the other hand, the GRP per capita of Guizhou was merely 3,762 yuan, meaning that Beijing’s income is roughly 3 times higher than the national average level and that Guizhou’s income is merely 1/5 of the national average level. As the real GDP per capita of China in 2007 was I$ 7,868 according to Table 1, this implies that Beijing’s real income per capita was I$ 23,803 as of 2007, when Guizhou’s real income per capita was I$ 3,029. In this case, we can say that Beijing’s real per capita income was at par with Korea’s as of 2007, when Guizhou’s real per capita income was close to the real per capita income of Korea in the 1970s. Table 2 shows each region’s real income per capita in I$ and shows the years when Korea’s income level matches each region’s income level.

When we calculate the income gap between Beijing and Korea using the IMF database, we can find out that 2007 per capita GRP of Beijing resembles the 1995 per capita GDP of Korea most. Considering the fact that 2007 per capita GDP of China resembled the 1981 per capita GDP of Korea most, it implies that income gap between Beijing and Korea is much smaller than the income gap between China and Korea.

Table 2 shows that there is wide range of income levels in various regions in China. Generally speaking, large cities like Beijing, Tianjin, and Shanghai have real per capita income levels that are close to those of Korea in the 2000s. Provinces in the coastal area, such as Shandong, Jiangsu, Zhejiang, and Guangdong, have income levels similar to those of Korea in the 1990s. The western inland areas of China, which are relatively underdeveloped, have income levels similar to those of Korea in the 1970s.

<Table 2> Real GRP Per Capita of Each Region (2007)

and Matching Years of Korea

Source: Calculated by authors using data from http://pwt.econ.upenn.edu/ and China Statistical Yearbook 2008 (China Statistics Press, Beijing, China).

II. Export Structure Gap

The concern of this paper, however, is not only to measure the income gap but also to estimate the structural time gap between two countries. According to the flying geese hypothesis of Akamatsu(1962), there exists a certain hierarchical order among East Asian economies. Japan has played a leading role in this hierarchy. The second tier of this hierarchy consists of NIEs, and the third tier consists of the ASEAN countries. Recently, the southeast coastal area of China has formed the fourth tier. The comparative advantage of exports shifted from one group of countries to the next group of countries as their industrial structures evolved over time. More specifically, as the labor cost of leading countries increases and as technological transfer from leading countries to following countries takes place, the comparative advantage of exports has changed over time. Following this hypothesis, we can assume that there will be a certain time gap in terms of the export structure among East Asian countries. In particular, it is the concern of this paper to determine this time gap between Korea and China.

1. Structural Gap Based on Rank Correlation

Let us first measure the structural time gap based on the export structure. As most exports are manufactured by the manufacturing sector in both countries, this paper focuses on export data from the manufacturing sector only. In particular, this paper uses 150 export commodities classified by the SITC(Rev 2) 3-digit data of the UN. To measure the export structure gap, it is necessary to find the year Korea’s export structure resembles the export structure of 2009 China most. This paper employs Spearman’s rank correlation measure(Rs) to find this. First, we need to assign a rank to each commodity according to its export volume in each country. Then, using the following equation, we can calculate Rs between the 2009 Chinese export data and the Korean export data of various years.

(Here, is the difference in the two countries’ ranks of commodity i, and n is the total number of commodities.)

By definition, Rs will approach ‘1’ as the two countries’ export structures begin to resemble each other and will approach ‘0’ otherwise. When the Rs values between the 2009 Chinese export data and the Korean export data of various years are calculated, Figure 1 shows the result.

<Figure 1> Rs between China (2009) and Korea (various years)

Source: UN Comtrade (http://comtrade.un.org/).

As depicted in Figure 1, Rs between China(2009) and Korea(various years) peaked in 1988 with a Rs value close to 0.75. This implies that the 2009 Chinese export structure resembles the 1988 Korean export structure most. In 1988, Korea’s export structure can be characterized as a mixture of labor-intensive products such as footwear, fabrics, and apparel, and capital-intensive products such as motor vehicles and ships. Moreover, some IT (information technology) related commodities began to emerge as the major export commodities starting in the mid-1980s. Just like Korea in 1988, China as of today has an export structure whose major components are a mixture of labor-intensive products, capital-intensive products, and IT-related products. In this regard, we can say that China as of 2009 has a time gap of 21 years with Korea in terms of the export structure of the two countries. However, this does not imply that China is lagging behind Korea by 21 years. As it is stated above, China has narrowed its income gap with Korea by relying on rapid growth of export. Also, as the Chinese export structure is upgraded in the future, it is possible that this time gap can be narrowed fast. To determine how this time gap has changed over time, a similar analysis was carried out between selected years for China and various years for Korea. This result is summarized in Table 3.

<Table 3> The Year when Rs between China (selected years) and Korea peaked

Note: Calculations of Rs between China (1990, 1995, 2000, and 2004) and Korea are cited from Table 3 of Lee and Kim (in Korean, 2005).

Table 3 shows somewhat puzzling but interesting finding. Since 1995, the Chinese export structures resemble the 1988 export structure of Korea most. This implies that the Chinese export structure did not change substantially between 1995 and 2009. Instead of upgrading its export structure, we can say that China has expanded its export volume massively during the period in question. Therefore, we can say that China has achieved rapid growth by increasing its export volume massively without changing its existing export structure substantially. As mentioned above, it is still dominated by a mixture of labor-intensive and capital-intensive commodities. On the other hand, the Korean export structure has changed substantially since the early 1990s. First, from 1994, labor-intensive products such as footwear, apparel, and outerwear disappeared from the top 10 export commodities of Korea. Additionally, the relative importance of IT-related commodities started to increase in the mid-1990s. Intermediate inputs such as motor vehicle parts and machines have become major export items since the early 2000s. To clarify this point, the top 10 export commodities of Korea and China in selected years are summarized in Table 4.

As expected, the top 10 export commodities of China from 1995 to 2009 show a considerable amount of overlap with those of 1988 Korea. For example, 6 commodities out of the top 10 export commodities of China in 2009 are in the top 10 export commodity list of Korea in 1988. On the other hand, when the 1988 Korea’s export structure is compared to the 2008 export structure of Korea, we can find noticeable differences. Only 4 commodities overlap between the 1988 and 2008 lists. In particular, chemical products such as polymerization & copolymerization products and hydrocarbons were among the top 10 export commodities in 2008. These chemical products were not even included among the top 30 export commodities in 1988. Furthermore, among the top 10 export commodities of Korea in 2008 are motor vehicle parts and machine parts, which were also not listed within the top 20 export commodities in 1988. Generally speaking, Korea’s export structure in 1988 was dominated by either labor-intensive product (such as footwear and apparel) or final-assembly products (such as automobile and computers). In order to produce these assembled products, Korea had to import core parts from advanced countries. However, by 2008, Korea had successfully upgraded its export structure by exporting sophisticated chemical products and core intermediate inputs. The fact that China’s export structure of today still resembles the export structure of Korea in the late 1980s implies that the Chinese export is still dominated by labor-intensive products and final-assembly products. Therefore, we can conclude that China has expanded its export volume massively over the last few decades without changing its export structure substantially. This fact can be compared to the Korean export industry of the 1970s and 1980s. Although Korea had invested considerably in the heavy and chemical industries from the mid-1970s, Korea’s export structure by the mid-1980s was still dominated by labor-intensive industries. For example, as of 1983, five out of the top 10 export items in Korea were labor-intensive products.

<Table 4> Top 10 Export Commodities of Korea and China

Source: UN Comtrade (http://comtrade.un.org/).

To examine the robustness of this result, the authors used two different ways to measure the time gap in terms of the export structure between China and Korea. First, only the top 50 export commodities of China as of 2009 were selected, and the rank correlations between the export structures of 2009 China and various years of Korea were measured. We attempted this because we considered the possibility that discrepancies in ranks among minor export items can distort the overall rank correlation. However, even when we calculated rank correlations with only the top 50 export items, the results did not differ. That is to say, the export structure of 2009 China resembled the export structure of 1988 Korea most.

Another way to calculate the rank correlation is to use export data that is more broadly categorized than the previous data set. To do this, let us now use the SITC 2-digit data instead of the SITC 3 digit data. According to the SITC 2-digit data, we have 35 commodities instead of 150 commodities. This examination is necessary because a different result may arise compared to previous calculations. However, as depicted in Figure 2, the 2009 Chinese export structure still resembles the 1989 Korean export structure most. In fact, the degree of resemblance increased with an Rs value of 0.83 when the SITC 2-digit data were used. Therefore, we can still conclude that the Chinese export structures between 1995 and 2009 resemble the export structure of Korea in the late 1980s most.

When we relate this finding with the income gap analysis, the following conclusion can be inferred. During the past few decades, China has narrowed the income gap with Korea by relying on rapid export-led growth. However, its export growth has been based on increasing its volume, not on upgrading its export structure. However, based on the experiences of Korea, China will soon experience the structural changes that come with an upgrade to its export structure. As shown in Table 3, the degree of similarity between China and Korea is becoming thinner. In this case, China will catch up with Korea not only in terms of income but also in terms of its export structure. Therefore, Korea will soon face tougher competition from Chinese export industries.

To examine whether or not the Chinese trade structure is becoming more competitive with Korea, let us now measure the trade complementary index and export similarity index between these two countries.

<Figure 2> Rs between China (2009) and Korea (various years)

- Calculated with the SITC 2-Digit Data

Source: UN Comtrade (http://comtrade.un.org/).

2. Complementary and Similarity Index between Korea and China

Now let us examine how complementary the trade structures are between Korea and China. It is a well-known fact that the bilateral trade balance between these two countries has skewed toward Korea over the last couple of decades. Since Korea established diplomatic relations with China in 1992, Korea has always enjoyed a trade surplus with China. As of 2009, Korea has had a trade surplus of approximately $32 billion with China.

One of the main reasons behind this chronic trade imbalance is that China’s trade structure is complementary to Korea’s trade structure. That is to say, China’s import structure is highly complementary to Korea’s export structure, whereas the reverse is not true. This hypothesis is confirmed by Zheng & Lin(2008) as well. Zheng & Lin(2008) analyzed the reasons behind the trade imbalance between China and Korea and concluded that a different development stage and trade structure has led to this outcome. Therefore, it would be very natural for Korea to export a larger volume of its products to the Chinese market than for China to export to Korea. To verify this point, let us analyze the complementary nature between the two countries using the TCI (trade complementary index) metric.

(Here, is the proportion vector of Korea’s export structure, and is the proportion vector of China’s import structure. Also, implies the squared value of X’X.)

By definition, when China’s import structure vector is identical to Korea’s export structure vector, TCI will have a value of ‘1’. When we calculate TCI using the SITC 3-digit data of trade in the manufacturing sector between Korea and China, the following figure illustrates the result.

As shown in Figure 3, the TCI between the Chinese import structure and the Korean export structure increased until 2000 and then peaked in that year, with a TCI of over 0.80. This fact is reflected in the following table as well. As shown in Table 5, most of the main import commodities of China overlap with the main export commodities of Korea as of 2000.

<Figure 3> TCI between Korean Exports and Chinese Imports, 1993-2008.

Source: UN Comtrade (http://comtrade.un.org/).

This results coincide with Kim and Lang(2010), Park(2009), Park and Kim(2006, 2009), and Park(2001). Most of these previous literatures conclude that China's trade structure was complementary to that of Korea until the mid-2000s.

However, after the TCI value peaked in 2000, it began to decline in the ensuing years. This implies that China’s trade structure has become more competitive with Korea’s trade structure from 2000. To verify this, we need to examine how competitive China’s export structure is to that of Korea’s. To do this, we use the ESI(export similarity index) between the export structures of the two countries. The ESI measure was first introduced by Finger and Kreinin(1979). It has been widely used by economists since then.

(In this equation, is the ratio of commodity i’s export out of Korea’s total manufacture export.)

<Table 5> Major Import and Export Commodities of China and Korea (2000)

Note: Commodities are based on SITC 2-digit data (Rev. 2).

Source: UN Comtrade (http://comtrade.un.org/).

By definition, the ESI between two countries will be close to ‘1’ as the two countries’ export structures more closely resemble each other. Therefore, as the ESI approaches ‘1’, we can interpret that the two countries’ export structures become more competitive. The result of this analysis is depicted in Figure 4.

<Figure 4> ESI between Korea and China, 1993-2008.

Source: UN Comtrade (http://comtrade.un.org/).

As suspected, the ESI between Korea and China began to increase circa 2000. This result coincides with Kim & Bark(2007), Zhang(2006), and Shang(2008). Also, existing literatures such as Kim(2009), Rhee(1999), Lim(2009), and Chung and Kim(2008) conclude that China has become more competitive to Korea in recent years. Thus, we can say that China’s import structure became increasingly complementary to the export structure of Korea until 2000. However, from 2000, the trade structures of the two countries have become more competitive rather than complementary to each other. Based on this observation, we conclude that China will start to narrow its trade structural gap with Korea in the near future.

From the above observation, we can infer that the Chinese trade structure has become more similar to the Korean trade structure over time. To examine this, we have calculated the TC(trade competitive index) of each country’s manufacturing industry and compared these two metrics with each other. TC measure is similar to the RCA(revealed comparative advantage) measure as it measures the relative competitiveness of a certain industry across industries. The equation for TC measure is the following:

(Here, and are correspondingly the export and import value of industry j)

By definition, the TC index ranges from -1 to 1. A TC index that is greater than 0 indicates that the industry is relatively competitive in terms of international trade. According to Wang(2010), an industry has very strong competitiveness if the TC index is greater than 0.8 and has strong competitiveness if the TC index is greater than 0.5 and smaller than 0.8. An industry has low competitiveness if the TC index is between 0 and 0.5 and it does not have any competitiveness if the TC index is between -0.5 and 0. An industry is inferior in terms of competitiveness if its TC index is between -0.8 and -0.5 and has very inferior competitiveness if the TC index is smaller than -0.8.

We calculated the TC indices for the manufacturing industries of Korea and China over time. These results are summarized in Table 6. The data for this calculation were obtained from the WTO.

<Table 6> Manufacturing Industry Trade Competitive Indices

Source: World Trade Organization(http://www.wto.org).

The above table illustrates that the trade competitiveness of Korea and China have improved over time. In particular, the rapid improvement of the Chinese TC index shows that China has narrowed the gap with Korea in recent years. To explore this point further, we calculated the TC indices of these two countries across main manufacturing industries. These results are summarized in Table 7.

<Table 7> Trade Competitive Indices of the Main Manufacturing

Source: World Trade Organization (http://www.wto.org).

The table above shows that the trade competitiveness of Korea and China have improved their trade competitiveness in almost every manufacturing industry except for textiles & clothing industry for Korea and the chemical industry for China. The table also shows that China has narrowed the TC gap with Korea in most of the manufacturing industries. In particular, China has overtaken Korea in the textiles & clothing industry. This finding is consistent with the previous analysis, which concludes that China’s trade structure has become more competitive with Korea’s in recent years.

The progress is slow, and it seems there are many uncertain factors on the road ahead in view of the general environment of global economy.