China's Changing Relationship with the World Economy

China's Changing Relationship with the World Economy

Timothy Taylor 14/07/2019 6

China's economy is simultaneously huge in absolute size and lagging far behind the world leaders on a per person basis. According to World Bank data, China's GDP (measuring in current US dollars) is $13.6 trillion, roughly triple the size of Germany or Japan, but still in second place among countries of the world behind the US GDP of $20.4 trillion. However, measured by per capita GDP, the World Bank data shows that China is at $9,770, just one-sixth of the US level of $62,641.

Any evaluation of China's economy finds itself bouncing back and forth between the enormous size that has already been achieved and the possibility of so much more growth and change in the future. This pattern keeps recurring in "China and the world: Inside the dynamics of a changing relationship," written by the team of Jonathan Woetzel, Jeongmin Seong, Nick Leung, Joe Ngai, James Manyika, Anu Madgavkar, Susan Lund, and Andrey Mironenko at the McKinsey Global Institute (July 2019).

Here's one illustration. The figure shows the total GDP of China, Japan, and Germany as a share of the US level, which is set at 100%. On this figure, Germany's GDP as a share of the US level peaked in 1979, and Japan's peaked in 1991.

What's interesting about China's situation is not just that the level has risen so sharply. In addition, the peaks for Germany and Japan happened when their levels of per capita GDP were similar or higher to the US level (given the prevailing exchange rates at the time). China's per capita GDP is much lower, suggesting much more room to grow. Similarly, the urbanization rates for Germany in 1979 and Japan in 1991 were in the 70s, while China's urbanization rate is only 58%--again suggesting considerably more room for China to grow.

Here are some other examples of the changes in China that have already happened, with a hint of the potential for much larger changes still remaining. The MGI report notes:

Trade: ... China became the world’s largest exporter of goods in 2009, and the largest trading nation in goods in 2013. China’s share of global goods trade increased from 1.9 percent in 2000 to 11.4 percent in 2017. In an analysis of 186 countries, China is the largest export destination for 33 countries and the largest source of imports for 65. ... However, China’s share of global services trade is 6.4 percent, about half that of goods trade.

Firms: ... Consider that in 2018 there were 110 firms from the mainland China and Hong Kong in the Global Fortune 500, getting toward the US tally of 126. ... However, although the share of these firms’ revenue earned outside China has increased, less than 20 percent of revenue is made overseas even by these global firms. To put this in context, the average share of revenue earned overseas for S&P 500 companies is 44 percent. Furthermore, only one Chinese company is in the world’s 100 most valuable brands.

Finance: China was also the world’s the second largest source of outbound FDI and the second largest recipient of inbound FDI from 2015 to 2017. ... Foreign ownership accounted for only about 2 percent of the Chinese banking system, 2 percent of the Chinese bond market, and about 6 percent of China’s stock market in 2018. Furthermore, in 2017, its inbound and outbound capital flows (including FDI, loans, debt, equity, and reserve assets) were only about 30 percent those of the United States. ...

Technology: China’s scale in R&D expenditure has soared—spending on domestic R&D rose from about $9 billion in 2000 to $293 billion in 2018—the second-highest in the world—thereby narrowing the gap with the United States. However, China still depends on imports of some core technologies such as semiconductors and optical devices, and intellectual property (IP) from abroad. In 2017, China incurred $29 billion worth of imported IP charges, while only charging others around $5 billion in exported IP charges (17 percent of its imports). China’s technology import contracts are highly concentrated geographically, with more than half of purchases of foreign R&D coming from only three countries—31 percent from the United States, 21 percent from Japan, and 10 percent from Germany.

Culture: China has invested heavily in building a global cultural presence. ... Furthermore, its financing of the global entertainment industry has led to more movies being shot in China: 12 percent of the world’s top 50 movies were shot at least partially in China in 2017, up from 2 percent in 2010. However, significant investment appears to have had yet to achieve mainstream cultural relevance globally. Chinese exports of television dramas in terms of the value of exports are only about one-third those of South Korea, and the number of subscribers to the top ten Chinese musicians on a global streaming platform are only three percent those of the top ten South Korean artists, for instance.

The MGI report argues that when looking specifically at trade, technology and financial capital, China's economy is becoming less dependent on the rest of the world, while the rest of the world economy is becoming more dependent on China. For example, one big shift in the last few years is that China's economy has been "rebalancing," which refers to a greater share China's output going to China's consumers and less to capital investment or exports. This shift also means that rising levels of consumption in China are a major force in driving global consumption of goods and services.

In 11 of the 16 quarters since 2015, domestic consumption contributed more than 60 percent of total GDP growth. In 2017 to 2018, about 76 percent of GDP growth came from domestic consumption, while net trade made a negative contribution to GDP growth. As recently as 2008, China’s net trade surplus amounted to 8 percent of GDP; by 2018, that figure was estimated to be only 1.3 percent—less than either Germany or South Korea, where net trade surpluses amount to between 5 and 8 percent of GDP. Rising demand and the development of domestic value chains in China also partly explain the recent decline in trade intensity at the global level. ...Although it only accounts for 10 percent of global household consumption, China was the source of 38 percent of global household consumption growth from 2010 to 2016, according to World Bank data. Moreover, in some categories including automobiles and mobile phones, China’s share of global consumption is 30 percent or more.

I read now and then about the prospect of China's economy "decoupling" from the US economy. From a US power politics point of view, I think the mental model here is how the economy of the Soviet Union operated in the decades after World War II. Most of the trade of the USSR operated within its own centrally-planned trading bloc, called the Council for Mutual Economic Assistance, of Soviet-controlled countries. The results in terms of output and quality were so miserably bad that jokes told by Russians about their economy became a staple among economists. Since the fall of the USSR, Russia's economy has staggered from one catastrophe another (for discussion, see here and here), while occasionally being buoyed up when oil prices are high.

China's situation is very different. Its economy is not reliant on exports of oil or other natural resources. China's government still controls the financial industry and steers funds to state-owned companies, but it is not following a Soviet-style approach to central planning. In the 21st century, China not isolating itself from the rest of the world economy; rather, it is actively building transportation and trade ties to countries around the world. The education and health levels of China's population are rising rapidly. Future economic growth for China is likely to be slower and bumpier than the pattern of the last 40 years--while still being notably faster on average than the growth of high-income economies like the U.S.

There are a number of hard questions to face about China's rise in the global economy, and many of the hardest ones go well beyond economics. But old mental models drawn from a time when the US was by far the dominant economy in the world and its main geopolitical opponent was the USSR are not likely to be very useful in searching for answers.

A version of this article first appeared on Conversable Economist

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  • Georgy Bee

    China is upgrading its economy by making coordinated efforts.

  • Joel Ezekiel

    Many challenges still remain

  • Neil Urwin

    The gap between rich and poor is large.

  • Liam Harwood

    Excellent article

  • Matt Sadler

    The trade war between China and America is intriguing. I don't know why but I feel like China is getting the upper hand.

  • Shedi Potter

    Like many things humanity has done in the past Globalization looks good on paper but we totally messed it up in the implementation. We did so by not adding one very important caveat. Business should have sought not just the lowest cost source of labour possible but the lowest cost of labour provided by a free person.

    China is not nor will it ever be a free country. Every benefit China has recieved from Western engagement had been channeled into creating the greatest surveillance state in human history.

    For the CCP any benefits of globalization must be theirs solely. Xi and the other communist bosses in China are counting on the greed of western businesses to exchange short term gains for those buisnesses for China stealing their technology. Once China has what it needs from western companies it will kick them all out while flooding the world market with cheap copies of those western companies products. Any Westerner who thinks there is the possibility of long term business prospects in China is beyond delusional.

    The same truth applies to the internet. Free uncensored access should have been the prerequisite for being connected to the World Wide Web. Now the free peoples of the world are being attacked by Authoritarian regimes who use misinformation to fracture free societies and attack the values that form their foundations.

    For the last 40 years with a dramatic acceleration since the turn of the Millennium the world have been moving towards the rise of Authoritarianism. And if the free world dosen't take the steps neccessary to protect it's values then by the the middle of the next century Western Democracy will face the same end Soviet Socialism met towards the end of the last century.

    But I doubt it will. It makes me glad I didn't have kids given the inheritance we in the west have decided to leave to our descendants.

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.


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