Report urges deeper engagement

Huang Yixuan
China's relationship with the rest of the world is changing, says McKinsey report, and exposure in terms of trade, technology and capital has fallen. 
Huang Yixuan

The value equivalent to up to 26 percent of global GDP by 2040 could depend on whether China and the world engage more or less, according to the latest report from the McKinsey Global Institute.

The relationship between China and the rest of the world is changing, it says, and while the world’s relative exposure to China has risen, its exposure to the rest of the world is declining.

China’s relative exposure to the rest of the world in terms of trade, technology, and capital has fallen, according to its China-World Exposure Index.

This reflects the rebalancing of China’s economy toward domestic consumption, which has contributed more than 60 percent of GDP growth in 11 of the 16 quarters since 2015. It also reflects the deepening of China’s own domestic supply chain, the report says.

"China’s economic miracle was fueled by industrialization, investment and trade, but today domestic consumption is the main driving force of growth," said Nick Leung, chairman of McKinsey & Company China. 

"At the same time, the increasing exposure of the rest of the world to China reflects China’s increasing importance as a market, supplier and provider of capital," Leung said, as the index for the world's relative exposure to China had climbed step by step to 1.2 in 2017 from 0.4 in 2000.

China’s opening up and internationalization have powered its growth, taking the economy to its status as the world’s largest in terms of purchasing power parity. 

"On many dimensions, China has become a global power," said Jonathan Woetzel, McKinsey & Company senior partner and a director of the institute.

"However, China’s scale has not always translated into global impact and many aspects of China’s relationship to the world remain underdeveloped," he added.

For instance, China has 11 percent of global goods trade, but only 6 percent of global trade in services. Meanwhile, China’s banking, securities, and bond markets rank in the global top three in size, but international players have limited presence with less than 6 percent foreign ownership, the report says.

"Economic reform and opening up over the past three decades has had enormous benefits for China — and on balance for the rest of the world. If China were to launch a 2.0 version of this effort, and the world takes action to encourage stronger economic collaboration, significant value could be created," Woetzel said.

For the future, McKinsey's simulation shows there is significant opportunity to further integrate China and the world. Between US$22 trillion to US$37 trillion of economic value (equivalent to about 15 to 26 percent of global GDP by 2040) could be at stake from less or more engagement between China and the world in five areas — trade, services, finance, topics related to global public goods such as climate change and infrastructure, and technology.

"Significant choices lie ahead that matter not only for China but also for the global economy. Deeper engagement could have large benefits for each," said Joe Ngai, managing partner of McKinsey’s China region.

"Reforming the global trading system to resolve disputes effectively, tackling climate change, and delivering the infrastructure the world needs will not happen without global collaboration."

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