A Truer Picture of China's Export Machine

8/8/2019 A Truer Picture of China's Export Machine

1/6

1

Is Chinas economic growth

largely dependent on exports,

or is it becoming more domestically

led? Thats a question economists

are vigorously debatingand

an important one or policy makers

and executives alike. An increasingly

consumption- and investment-

ocused Chinese economy could

improve the chances o more

balanced trading relationships with

developed economies. At the

same time, businesses operating in

China or planning to enter it could

fnd greater opportunities as the

economy accelerated its transition

rom a manuacturing center to a

key consumer market.

To shed light on this question, we

developed a new way o measuring

the role o export growth in Chinas

overall economic expansion.

We ound that exports have been

a major driver, but not one as

dominant as commonly believed.

Indeed, there are clear signs

that a shit toward domestically

driven economic growth is

well under way. The picture that

emerges o the Chinese econ-

omy has implications or the growth

and supply chain strategies o

businesses in China and elsewhere.1

A different way to measure

exports

Arguments over the true nature

o Chinas economic reliance on

exports have been rooted in the

difculty o appropriately measuring

the export sector. The traditional

measure governments and most

analysts use is the growth o

total exports as a share o GDP

growth. This measure indicates that

John Horn, Vivien Singer,

and Jonathan Woetzel

Chinas growth depends less on exports than

conventional wisdom suggests.

A truer picture o Chinas

export machine

s t r a t e g y p r a c t i c e

September 2010


2/6

2A truer picture o Chinas export machine

contribute to GDP. On the other

hand, a strict net export measure(exports minus imports) under-

estimates the contribution o exports

to GDP, because many imports

arent used in assembly and

exported but rather sold to Chinese

consumers and businesses.

We calculated a measure we

call domestic value-added exports

(DVAE) to assess more accurately

the role o exports in GDP growth.

DVAE is what you get ater sub-

tracting rom total exports only

those imports used in the production

o goods and services that

are subsequently exported. In auto-

mobiles, or example, fnished

imports are not subtracted rom

our measure o exports. But engineparts imported to manuacture

motor bikes or export would be.

Governments usually dont break

out total imports into those

used domestically (or production,

investment, and consumption)

and those used or exports, and

China is no exception. So we

estimated the countrys DVAE by

using data rom three dierent

sources, each with its own strengths

and limitations. The results were

remarkably consistentand

collectively shed a powerul light

on the evolution o supply chain

strategies, Chinese consumption,

and Chinese economic perormance

during the global downturn (see

sidebar, About the research).

Supply chain shifts

On average, our analysis suggests

that imported goods accounted

or 40 to 55 percent o the value o

total exports rom 2002 to 2008.

Put another way, roughly hal o

Chinas exports represent domestic

export growth has accounted,

on average, or almost 40 percento the total growth in real GDP

since 1990rising to almost 60 per-

cent since 2000.2

Yet these numbers, por traying a

dominant and growing role o exports,

are at odds with the act that

China was one o the ew countries

that escaped the great 200809

global downturn without a major

economic slowdownsuggesting

that internal growth played an

important role. Thats one reason

other economists have used a

very dierent measure: growth in net

exports (total exports minus total

imports) as a share o GDP growth.

By that metric, exports contributed

only between 10 and 20 percento Chinas annual 10 percent GDP

growth in recent years.

We contend that both measures

are misleading. Using total exports

neglects the act that many o

Chinas export shipments include a

air number o imported goods

that are reassembled, combined

with domestic content, or other-

wise modifed beore being exported.

Failing to remove these imports

rom the total export fgure over-

states how much value exports

There are clear signs thata shit to domestically

driven economic growth

is well under way.


3/6

3

value added. Concurrently, DVAEs

share o exports generally has risen

over time, suggesting that China

has become less o a pure assembler

o imported goodsa publicly

stated government policy goal.

That has implications or many

companies supply chains and

business models. I your company

is a manuacturer in China that

is primarily processing intermediate

components or reexporta

Taiwan-based original-design

manuacturer (ODM) o household

goods, or exampleits probably

time to consider alternative

locations or the assembly work.

With China moving up the valuechain and beginning to export more

skill-intensive goods and services,

chances are that pure assembly will

soon be less costly in other parts

o Asia.

Exports, consumption,

and strategy

We also applied our DVAE analysis

to reassess the contribution o

exports to GDP growth in the years

or which we have overlapping

data among our three metrics. We

ound that Chinas export sector

contributed 19 to 33 percent o total

GDP growth between 2002 and

2008 (Exhibit 1). Thats only about

hal o the export contribution

indicated by traditional total-

exports measures.3

In other words, DVAE analysissuggests that exports have been an

important driver o Chinas growth,

but not the dominant one, and

Exhibit 1

Traditional measures overestimate the contribution o

exports to Chinas GDP growth.

Growth in real exports1 as % of GDP growth

64

2006 20082002

33

60

3233

19

Total exports Domestic value-added exports (DVAE)2

1Growth in China slowed in 2008 to 8.9% (on an expenditure basis), from 12.9% in 2007, while global growth declinedto 1.9%, from 4%, with negative growth in the 4th quarterthe beginning of the global recession.

2DVAE = total exports minus those imports used in the production of goods and services that are subsequentlyexported; calculated as average of values, using data available for given year: 51% of total exports in 2002, 53% in2006, 57% in 2008.

Source: China Customs data; Robert Koopman, Zhi Wang, and Shang-Jin Wei, How much of Chinese exports is really

made in China? Assessing foreign and domestic value-added in gross exports, US International Trade Commission,Oce of Economics, working paper, March 2008


4/6


that most common wisdom over-

estimates the role o exports

while underestimating the role o

domestic consumption or Chinas

growth. Any Chinese or multi-

national company that currently

manuactures goods in China and

primarily exports them to other

countries should ask itsel whether

it needs to scale up its domestic

Exhibit 2

Since 2007, the contribution o exports to overall growth

has declined dramatically.

Privateconsumption

Decomposition of GDP growth, %

Govern-ment con-sumption

ExportsInvest-ment

Importsnot usedin exports

GDPgrowth1

Inventorychange

DVAE2

+3.3

7.4 total exports4.1 imports used in exports

+3.1

+5.0+1.3

1.1+0.3 11.9

+1.3

(2.9 1.6)

3.2

(7.2 + 4.0)

+3.6 +3.9 +1.2 1.6 +0.5 8.9

200207

2008

+2.6 +4.6 +2.2 +1.7 +0.3 8.12009

1 Calculated on expenditure basis; figures may dier from those based on industry value added, depending in part on

updates released by Chinese government.2Domestic value-added exports (DVAE) = total exports minus those imports used in the production of goods and

services that are subsequently exported.

Source: Robert Koopman, Zhi Wang, and Shang-Jin Wei, How much of Chinese exports is really made in China?

Assessing foreign and domestic value-added in gross exports, US International Trade Commission, Oce of

Economics, working paper, March 2008

strategy to get a bigger piece o the

pie. This involves developing a

more granular understanding o the

Chinese market, making products

that appeal to the Chinese consumer,

and fnding ways to market and

distribute them eectivelyall

while contending with increasingly

ormidable Chinese competitors.4


5/6

5

role or private consumption, invest-

ment, and fnished imports explains

how China could weather the down-

turn well and indicates movement

toward a domestically ocused econ-

omy, even though exports will

probably continue to play an impor-

tant role when the global economy

picks up.

O course, continued changes in

the value o the renminbi in the

coming years will also aect the

evolution o Chinese trade. The

more value-added-ocused export

sector suggested by our DVAE

analysis implies that a greater share

Chinas downturn and

the road ahead

A comparison between DVAEs

contribution to growth and that o

other major macroeconomic

components shows that DVAE

topped private consumption,

but was less important than invest-

ment, over the 200207 period

(Exhibit 2). In the downturn years,

2008 and 2009,5 exports con-

tributed much less to growth than

other actors did, which explains

why the Chinese economy could

not ully match its GDP growth

rates in the earlier part o the decade.

However, the shit to a greater

About the research

To estimate domestic value-added exports (DVAE), we took three

approaches, using data rom three dierent sources. First, we applied

a sector-based approach, using data rom IHS Global Insight, which

provided Chinese import data or more than 30 industries. We classifed

them as industries producing fnished goods (such as ood and beverages),

intermediate products (industrial chemicals, or example), or raw materials

(such as the mining industry). We then assumed that all intermediateproducts and raw materials were used or creating exports, while none

o the fnished-goods industries accounted or exports.

The second approach applied inputoutput measures at the industry

level, using data rom a working paper rom the US International

Trade Commissions Ofce o Economics.1 The third metric came rom

Chinas ofcial customs data on reexportsproducts whose par ts

are imported, assembled, and then exported. We assumed that all such

reexports were made rom imported goods, while all other exportswere made rom domestic content only. Removing the reexports let us

with our third proxy or DVAE.

1Robert Koopman, Zhi Wang, and Shang-Jin Wei, How much o Chinese exports is

really made in China? Assessing oreign and domestic value-added in gross exports, US

International Trade Commission, Oce o Economics, working paper, March 2008.


6/6


o exports will consist o higher-

priced goods that compete more

directly with those o developed

nations. That, coupled with an appre-

ciating Chinese currency, points

to the creation o more balanced

trading partnerships with the

rest o the worldand an important

shit in context when businesses

consider uture strategic moves in

China.

John Hornis a consultant in

McKinseys Washington, DC, ofce;

Vivien Singer is a consultant

with the McKinsey Global Institute;

and Jonathan Woetzel is

a director in the Shanghai ofce.

1 In this article, we address only national

GDP, not employment or regional efects

within China. Our interest is the overall

health o the Chinese economy, and we leave

aside the question o which groups or

regions are better of because o any changes

in the overall level o exports.2Calculated rom the McKinsey Global

Institute (MGI) China urbanizat ion model.3Not surprising, exports measured by

domestic value-added exports (DVAE)

contributed morealmost two times more

to GDP growth than exports measured

on a net basis. DVAE thereore represents

a middle ground between total- and

net-export measures.4See Jef Galvin, Jimmy Hexter, and Martin

Hirt, Building a second home in China,

mckinseyquarterly.com, June 2010; and

Yuval Atsmon et al., 2009 Annual Chinese

Consumer Study, Part II: One Country,

Many MarketsTargeting the Chinese

Consumer with McKinseyClusterMap,

McKinsey Insights China, September 2009.5The DVAE or 2009 is based on data rom

IHS Global Insight only.

Copyright 2010 McKinsey & Company.

All rights reserved. We welcome your

comments on this article. Please send them

to [email protected].

A Truer Picture of China's Export Machine

Documents

Transcript of A Truer Picture of China's Export Machine