Why China is an important market among global export traders

It's big on domestic demand.

Its export According to UBS Investment Research, China’s economy is the second largest one in the world and the fastest growing large one, but its “true” importance for the global economy is often questioned.

UBS noted that the conventional wisdom is that China matters mainly for the smaller neighbouring economies and commodity exporters, and much less for the rest of the world; and, given the increasing vertical integration in the production chain in East Asia, even the exposure of many Asian economies to China is just indirect exposure to the US and other advanced economies.

"These are valid points to some extent, of course, but China’s importance has grown for almost everyone, including large developed economies. Moreover, China’s import structure has evolved over the years as the country moved up the value chain, a trend that could continue and have significant implications for different exporters," said UBS.

Here's more:

In this year’s version of our annual China export exposure chart book, we show that China’s importance as a market has grown significantly for almost all major trading partners over the past decade. In the case of Japan, the EU, Korea, Australia and India, China’s importance has more than doubled or tripled.

For Germany, although China only accounts for 6% of its total exports in 2012, slightly more than Italy (5%), there have been big changes over the past decade. Ten years ago, China accounted for a mere 2.2% of total German exports while Italy accounted for 7.3%. That is to say, over the past 10 years, China’s demand has contributed to about 9% of overall German export growth whereas Italian demand has contributed negatively.

How much does China really matter though? In other words, to what extent are these exports to China for China’s domestic use rather than re-exports to the rest of the world?

After all, it is well known that more than 40% of China’s exports are processing exports where the import content is high. We try to estimate the portion of China’s imports for domestic usage for each major partner economy, based on the types of products they export to China.

As summarized in the chart below, indeed a large share of exports to China by many Asian economies are intermediate goods or processing components that are eventually exported by China, rather than for final domestic demand within China, most notably, Taiwan, Korea, and some Southeast Asian economies.

Nevertheless, China’s final domestic demand does matter a great deal for most Asian economies, including Japan.

A recent joint project of the OECD and WTO measures global trade in value-added terms (TiVA), which arguably measures the “true” trade link by summing up all value-added in a country’s direct and indirect exports to another while subtracting from it the part that is used for re-exports as well as the imported valueadded embedded in the exports.

According to these estimates, China’s own domestic demand remains the most important final use of value-added exports of Australia, Taiwan, and Korea, and still accounted for 14% of Japan’s total exports as of 2009 (the latest available data point).

From China’s point of view, the top five import sources are the EU, Japan, Korea, the US, and Taiwan, in that order. In value-added terms, the EU is by far the largest source of imports for China’s own final consumption, and the US becomes the second largest source, surpassing that of Japan and Korea. Imports from Taiwan became less important than that from Australia for China’s own domestic consumption.