China and the World – Highlights from the McKinsey Report

Last year, the McKinsey Global Institute published a report called “China and the World”. I think this is by far the most interesting report I have read in the last few years. There is only one problem: This PDF is 162 pages long. For readers who want an executive summary, I’d like to offer my own version of the highlights.

China will continue to grow in the next 10-15 years.

The last 30 years of growth in China is truly a miracle. Compared to Japan in the 1990s, China’s current income and urbanization rates are still relatively low. This suggests that China has significant growth potential.

When Ezra Vogel wrote “Japan as Number One”, Japan’s GDP was roughly 70% of the US GDP. China is getting close to the same level, with tons of potential. 

China has achieved global scale, but more can be done to integrate.

Before China’s economic reform – ‘reform and opening up’ – there was almost no business connection between China and the rest of the world. Forty years later, China is clearly much more integrated into the global economy. However, more can be done to integrate as compared to the US.

Other interesting insights are that China has been reducing its exposure to the world, while the world’s exposure to China has increased. This might be one of the main sources of frustration from the West.

In a few key strategic areas, China has started to demonstrate its leadership position.

China’s growth involves more than just the size of the economy. In a few key strategic areas, China is gaining a leadership position. In the last blog post, I listed a few areas in which China is leading. This report shows some interesting numbers regarding renewable energy and batteries for electronic cars.

China still relies on global value chains for some key inputs.

However, in most of the key areas, China still relies on global value chains. To be fair, no country might be capable of building a huge economy without any global connection. The best case study here is North Korea.

It’s the case for EV, although China is the biggest manufacturer and consumer market for EV cars.

Not surprisingly, China is gaining more shares in small, low value-added markets. As the value chain goes up, Chinese suppliers start to lose market control.

China did open up its market to other countries since it joined the WTO.

One typical criticism of China is that it took advantage of the WTO but did not open up its market at all. However, the following OECD data shows that China did make a good effort to open its market, though there are still some gaps against the OECD average. 

At this point, multinational corporation penetration in China is actually higher than it is in the US.

The US still has strong power to influence China, though the US needs to act quickly.

After he became president, Trump started the US-China trade war. Given China’s dependency on the global value chain, some of the actions should work if the only purpose is to slow down the growth of the economy in China. Over half of China’s technology imports are from the US, and this share has not decreased in the last decades.

However, the US does need to act quickly, as its relative GDP share and the world’s exposure has been steadily decreasing in the last few years. Interestingly, US exposure to the world has been increasing during the same time horizon.

Based on the historical norms, it takes only 10-20 years for a country to catch up and lead in one technology category. This is how Japan, South Korea, and Taiwan built their semiconductor and auto empires.

China remains the No. 1 market to provide growth for Fortune 500 companies.

No matter how heated the US-China trade war becomes, China remains a very important market for big global companies. The growth of China’s consumer market is comparable to that of the US and Europe combined. It’s simply too big to lose.

I found the following chart very interesting. Consumption of coffee did not increase much in terms of share of global GDP. No wonder every single coffee chain thinks that China is the next frontier. As China becomes the biggest aging society, healthcare can be a massive opportunity for global players. Other than that, the Chinese eat lots of fish, drink lots of spirits, and spend a lot on mobile phones.  

Ending words.

I hope you find this report interesting. As an ex-McKinsey Business Analyst, I offer my kudos to whoever worked on this report. You must have had many sleepless nights! For folks who want to reach out to the McKinsey contacts who wrote this report, you can ping my old boss Jonathan Woetzel here.

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