In a report China and the world: Inside the dynamics of a changing relationship dated June, 2019, McKinsey Global Institute highlights the following insights:
(a) China’s exposure to the world in trade, technology, and capital has fallen. Conversely, the world’s exposure to China has increased. This reflects the rebalancing of the Chinese economy towards domestic consumption, which contributed 76% of China's GDP growth in 2017-18 while net trade registered a negative contribution.
(b) China’s consumer markets are heavily integrated with the world. Penetration by multinational corporations is considerable. Across the ten large consumer categories, their average penetration was 40% in 2017, compared with 26% in the United States.
(c) China’s technology value chains are highly integrated globally. Chinese players have grown rapidly, but they still import critical components such as reduction gears (robotics), power electronics (electric vehicles), and semiconductors.
(d) More or less engagement with China translates into a difference of $22-37 trillion or 15-26% of global GDP by 2040.
Since the Mckinsey report, intensifying US-China trade war has pushed many manufacturing operations in China to the rest of Asia and other parts of the world. However, many of these operations remain dependent on intermediate inputs from China such as specialized parts, components, and supporting services.
On the one hand, this is likely to deepen exposure to China. On the other hand, in response to US pushback, China is doubling down on technological self-reliance, accelerating China's process of vertical integration.
A Nataxis Report of 21 October, 2019 shows that China's Vertical Integration Leads to Less Dependence on Asian Regional Value Chain. A Nataxis podcast of 31 October reiterates the same trend as regards the European Union on both counts:
"EU Member states are generally becoming more integrated with China’s value chain. The problem with this development, though, is that such integration with China is increasingly asymmetric. Meaning, China imports increasingly fewer intermediate goods from the EU, but it exports increasingly more intermediates to EU member states for their re-export. The EU depends more on Chinese inputs for exports while China relies less on EU goods for its exports."
A further Nataxis Report of 4 November confirms the same situation with the United States:
"Our analysis shows that the US declining participation in the global value chain is driven by both its reduction in exporting of intermediates used for inputs in others’ exports, an area where it generally excels, and its reliance on foreign inputs for its production. At the same time, the US is increasingly dependent on Chinese intermediates for exports while China is reducing its vulnerability to US imports of inputs for exports."
"Like Europe, the US is not only losing grounds to China in terms of its integration with China’s value chain but also reducing its participation with other regions in the world, such as Latin America, Europe and the rest of Asia. To this increasingly difficult situation in terms of the external competitiveness of the US, we need to add China’s efforts to move up the ladder as made clear in its landmark plan for industrial policy, namely Made in China 2025......"
As China's Belt and Road Initiative gathers momentum with more extensive infrastructural and other linkages across the globe, the above trend of increasing China dependence is likley to deepen in decades to come, gravitating towards a China-centric world economic order.
These developments beg the question how successful the current US threat of decoupling China from the world supply and value chain is likely to be.
