Is China's demand for resources driven predominantly by domestic factors or by global demand for its exports? The answer to this question is important for many resource-exporting countries, such as Australia, Brazil, Canada and India. This paper provides evidence that China's (mainly manufacturing) exports have been a significant driver of its demand for resource commodities over recent decades.

First, it employs input-output tables to demonstrate that, historically, manufacturing has been at least as important as construction as a driver of China's demand for resource-intensive metal products. Second, it shows that global trade in non-oil resource commodities can be described by the gravity model of trade. Using this model it is found that, controlling for domestic expenditure (including investment), exports are a sizeable and significant determinant of a country's resource imports, and that this has been true for China as well as for other countries.

Eoin Treacy's view This is an interesting report not least from the perspective of who is asking the question. Australia has come through the global recession in comparatively sound shape, primarily because the slowdown in the domestic economy has been at least partially offset by commodity exports. As a result, Australia may be more dependent on commodity exports now than it was prior to the global financial crisis.

There is little doubt that the Chinese steel market is in massive oversupply. This was confirmed to me by the head of ThyssenKrupp in Shanghai last July. He also stressed that very little was being done about the situation. Steel production is a large employer and a rationalisation program is difficult to implement nationally because of the autonomy enjoyed by individual states and counties. However, this does not mean that Chinese steel production even at current levels is sustainable over the long term. At some point it will have to be rationalised which will have a knock-on effect for the countries most dependent on the raw materials needed to manufacture the alloy.

Therefore shares such as the major iron-ore and coal exporters are well worth watching because they could act as bellwethers for any slowdown in Chinese consumption of important Australian exports. There is currently no change in the status quo. BHP Billiton has just announced a share buyback scheme following the failed the bid for Potash Corp of Saskatchewan, which should help to support prices in the current region. A sustained move below 2000p would be required to question medium-term upside potential.