World has become more exposed to China, but not the reverse


Visitors to Tianzifang, a popular enclave of shops and cafés in the area of ​​the French concession in Shanghai.

Yen Nee Lee | CNBC

According to a July report from the consulting firm McKinsey and Company, the world has been more exposed economically to China at a time when the Asian giant is increasingly dependent on its own consumers to boost growth.

McKinsey's findings come as China is caught up in a one-year tariff struggle with the United States that has spread to areas such as technology and security. Economists have generally predicted that the Chinese economy, rather than the United States, will experience a greater impact due to high tariffs, in part because of the country's relatively higher dependence on exports.

But the McKinsey report found that consumption contributed to more than 60% of China's growth during 11 of the 16 quarters, from January 2015 to December 2018.

That means that China's economy has been reducing its dependence on trade as a source of growth. In fact, the study found that China's net trade, the value of total exports minus that of imports, "actually made a negative contribution" to last year's growth.

"I think that's one of the things they're trying to do: to build a stronger and more diversified economy," Oliver Tonby, president of McKinsey in Asia, told CNBC's "Squawk Box."

China's exposure to the world in relative terms has declined because the main driver of its economic growth is no longer trade or investment, but domestic consumption.

The consultant studied how China and the world are linked through trade, capital and technology. He found that the growing importance of Chinese consumers to support growth means that manufacturers in the country are selling more to domestic consumers and less to the world.

As a result, China exported only 9% of its production in 2017, up from 17% in 2007, according to the McKinsey study. That shows that China has become more self-sufficient and less exposed to the rest of the world, according to the investigation.

"China's exposure to the world in relative terms has declined because the main driver of its economic growth is no longer trade or investment, but domestic consumption," the consultant said in the report. "The decline in China's exposure also reflects the reality that the economy is still relatively closed compared to the developed economies."

graphic 190715 mckinsey world exhibition china

In contrast, the rest of the world has become more dependent on China, according to the report. Countries are exchanging more products with China or receiving more investment from Beijing, McKinsey said.

The consultant identified three groups of countries that are most exposed to China:

  • Asian economies such as South Korea, Singapore, Malaysia, the Philippines and Vietnam. These countries are closely connected to China in global supply chains.
  • Countries rich in resources such as Australia, Chile, Costa Rica, Ghana and South Africa, which export to China.
  • Emerging markets such as Egypt and Pakistan, which are highly exposed to China's investments.

"Sectors and countries with different degrees of exposure to China's economy may be more or less vulnerable to a changing relationship between China and the world," McKinsey said. "The growing exposure of the rest of the world to China reflects the growing importance of China as a market, supplier and provider of capital."

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