KOREA CAPITAL MARKET INSTITUTE

This research analyzes the structural changes in Chinese economy and its impact on Korea’s exports to China over time. First, we explain the recent drop of Chinese trade in terms of domestic/structural and external/cyclical factors. For the domestic and structural factors, China has shifted its economic policy focus from export and manufacturing to consumption and service which require less imports. In addition, the increased competitiveness of Chinese firms has contributed to replacing the imports of skill-intensive intermediary goods. For external and cyclical factors, the economic slowdown in advanced economies since the global financial crisis has limited Chinese exports, while the recent drop in commodity prices significantly reduced China’s imports from commodity exporting countries. In order to take these factors into account, we estimated time-varying parameter VAR including Chinese external exports, Chinese GDP and Korea’s exports to China to find out the time-varying impact of China’s structural changes in external trade and domestic demand on Korea’s exports. The result suggests that while Chinese external exports have been less stimulating Korea’s exports to China, China’s domestic demand has been gaining greater relevance over time.