Inside the dynamics of a changing relationship · 7/9/2019 · Mining and quarrying. Chemicals....

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July 2019

Inside the dynamics of a changing relationship

China and the world

Last Modified 7/3/2019 1:00 AM

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China is rising

0

100

20

60

40

80

10

30

50

70

90

110

Japan

2017

Germany

701960 9080 2000 10

China

United States

Russia

Country GDP evolution 1960-2017, United States = 100; current $

Per capita GDP as % of United StatesUrbanization rate, % 78 5873

151 1596

Germany 1979 Japan 1995 China 2017

SOURCE: World Bank; McKinsey Global Institute Analysis


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6

20

0

10

24

24

8

12141618

22

26

Are we doomed?

1850 20001900 19501875 1925 1975

Global trade as a share of world GDP 1850-2016, percentage

Ruling power:

Rising power:

SOURCE: Historical data 1900-1960 on IMTS, by statistics office of UN (May 1962 draft); Export volume worldwide 1950-2016 by Statistica .com; Historical GDP by Angus Maddison; The Dynamics of Socio-Economic Development, by Adam Szirmai; WDI online; OECD database, Graham Allison (Thucydides Trap special initiative of Harvard Kennedy School)

War No war

McKinsey & Company 4

Key messages

China has achieved global scale but more can be done to integrate with the world

The relationship between China and the world is changing: China has been reducing its relative exposure to the world, while the world's exposure to China has risen

Businesses will need to adjust their approach to navigate the uncertainties ahead

The value at stake from more and less engagement betweenChina and the world is significant: Our simulation suggests $22 trillion to $37 trillion economic value potentially at stake (equivalent to 15 to 26 percent of global GDP) by 2040


China has achieved global scale but more can be done to integrate with the world


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We looked at China’s global connectivity on eight dimensions.

8

1 Trade

Environmental impact

5 Technology

4 People

3 Capital

2 Firms

6 Data

7

Culture


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China has become the world’s largest trader of goods, but its share of global trade in services is less significant.

2

16

11 11

China United States

Share of global services trade, %

4

15

6

13

China United States

2000 2017

1Trade

Share of global goods trade, %

Source: World Bank; McKinsey Global Institute analysis


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Countries with regional proximity, significant trade in resources, and cross-border capital flows are the most exposed to China. Low High

Source: IHS Markit; National Bureau of Statistics; McKinsey Global Institute analysis

Demand exposure1 Supply exposure1 Capital exposure1

11118

1111161398

15<11722452

6111418137

105

18657536355

<16

<1513

<1<143

13863

<1<1<12

Archetypes CountriesSouth KoreaMalaysiaPhilippinesSingaporeVietnamAustraliaChileCosta RicaGhanaSouth AfricaEgyptPakistanPeruPortugalUnited StatesGermanyJapanUnited Kingdom

Regional proximity exposure

Resource-related exposure

Capital exposure

Developed economies

1 Demand exposure = exports to China as % of domestic production, Supply exposure=imports from China as share of domestic con sumption,, capital exposure = Inbound FDI from China as a share of domestic investment.


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Technology, labor-intensive tradables, and resource value chains are exposed to trade with China.Low High

Archetype Sectors Trade intensityChina’s share of global exports

China’s share of global imports

High level of integration

Computer, electronic, and optical productsElectrical equipmentOther machinery and equipment

High exposure to Chinese exports

Textiles, apparel, and leatherFurniture, safety, fire, otherOther non-metallic mineral products

Rubber and plasticsBasic metals

High exposure to Chinese imports

Mining and quarryingChemicalsPaper and paper products

Global chains with little trade exposure to China

Other transport equipmentPharmaceuticalsMotor vehicles and trailersCoke and refined petroleum productsFood, beverages, and tobaccoFabricated metal productsWood and wood productsPrinting and mediaAgriculture, forestry, and fishing

28 1627 917 940 526 422 819 713 81 219 129 126 54 33 74 64 623 522 318 45 19

Local production for local consumption


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China has nearly as many firms in the Global Fortune 500 as the United States, but most Chinese revenue is still earned domestically.

100

60

0

20

80

40

120

140

160

180

2007 2010 2015 2018

United StatesChina1

JapanGermanyUnited KingdomAustralia

19

44

China United States

Source: Bloomberg; Fortune; S&P; McKinsey Global Institute analysis

1 Includes companies from mainland China and Hong Kong.2 Revenue analysis for China is for firms in Global Fortune 500; revenue analysis for US firms includes all firms in S&P 500.

Firms

2

Share of revenue earned outside home country,2 %, 2017Number of companies in Global Fortune 500


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1,538

436

United States China

-72%

1,183

380

United States China

-68%

33

15

11UnitedKingdom

China

UnitedStates

38

9

6

China

UnitedStates

UnitedKingdom

Total banking assets

Source: United Nations; BIS; McKinsey Global Institute analysis

Inflows to… % of foreign ownership

2

13

45

% of foreign ownership

22

6

54

1 Latest year available.

China’s financial system is in the global top three, but foreign ownership is low and cross-border flows are relatively limited.

Capital

3

Cross-border capital flows by region, 2017, $ billion

Financial system size, 3 large financial economies1, $ trillion

Outflows from… Stock market capitalization


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92.8

Outbound flows of Chinese students and tourists are significant, but migration and inbound flows remain relatively limited.

3 4

20170.2

2017 1990–2017

Source: OECD; United Nations; World Bank: McKinsey Global Institute analysis

People

4

Chinese share of people flows,%

Overseas students Tourists Migration

Outbound Chinese students as a share of global overseas tertiary students

Outbound Chinese tourist trips as a share of global international tourism

Chinese outbound migrants as a share of global migrant population

Inbound overseas students as a share of global overseas tertiary students

Inbound tourist trips as a share of global international tourism

Inbound migrants as a share of global migrant population

Inbound

Outbound


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China has increased its investment in R&D, but is still a significant importer of technology.

300

0

200

50

350

100

150

250

400

450

500

550

2000 2005 2010

Japan

2017

China

GermanySouth Korea

UnitedStates

China

29

128

UnitedStates

5

51

742

21

Japan

2013

Germany

9

South Korea

Rec

eipt

s (e

xpor

ts)

Paym

ents

(im

ports

)

Technology

5$ billion

Trade in IP charges by country, 2017R&D expenditure by country

Source: OECD; IMF Balance of Payments; McKinsey Global Institute analysis


The relationship between China and the world is changing


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China-World Exposure Index (trade, technology, and capital)

China has been reducing its relative exposure to the world while the world has been increasing its exposure to China.

0.4

0.7

1.11.2

0.80.9

0.70.6

20172000 2007 2012

Weighted averageexposure of 7 large economies1

= 1.0

China exposure to the worldWorld exposure to China

Source: McKinsey Global Institute analysis

1 China, France, Germany, India, Japan, United Kingdom, and United States.


The value at stake from more and less engagement betweenChina and the world is significant


The value at stake from more and less engagement between China and the world is significant.

Source: McKinsey Global Institute analysis

Growth as an import destination

Liberalization of services

Globalization of financial markets

Collaboration on global public goods

Flows of technology and innovation

Areas of engagement

Effects of climate change could be significant beyond 2040

1

2

3

4

5

5–8

3–5

3–6

8–12

3-6

Note: Our estimates of the value at stake are the result of a simulation based on a specific set of conditions and assumptions; they should not be taken as forecasts. We used McKinsey’s Global Growth Model as the basis for simulation and modeled potential upsides and downsides depending on how more- or less-engagement scenarios affect key economic drivers. The simulation focuses on the long-term economic impact and is not an attempt to predict the outcome of current debates on trade and tariffs.

Between $22 trillion to $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

Potential value at stake, $ trillion, 2040


Businesses will need to adjust their approach to navigate the uncertainties ahead

How to manage through uncertainty

02

03

04

01

Determine investment and value chain posture

Develop operational excellence

to manage risks and uncertainty

Adopt a survivor’s mindset, looking for

opportunities to acquire and restructure

Assess short- and long-term exposure to China-

World relationship

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Inside the dynamics of a changing relationship · 7/9/2019 · Mining and quarrying. Chemicals....

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