Where does China stand in an evolving world order?
Wednesday,Nov 06, 2019
Jeongmin Seong, senior fellow of McKinsey Global Institute in an exclusive interview with CGTN. /CGTN photo
Chinese President Xi Jinping delivered a keynote speech at the China International Import Expo (CIIE) in Shanghai on Tuesday. Xi reiterated principles of multilateralism and demanded global trade barriers be removed. He also pledged the continued opening-up of China's market and strengthening protection of intellectual property rights.
The remarks come as U.S. and Chinese negotiators work to finalize a "phase one" agreement for Xi and U.S. President Donald Trump this month to ease the trade frictions amid a global economic slowdown.
"There is no single country that can resolve itself the difficulties facing the development of the world's economy," Xi said in the speech. "We need to join hands with each other instead of letting go of each other's hands. We need to tear down walls, not to erect walls. We need to stand firm against protectionism and unilateralism."
In an exclusive interview with CGTN, Jeongmin Seong, a senior fellow of McKinsey Global Institute shared his thoughts on China's relationship with the world. Having lived in China since 2003 and immersed in China studies for over a decade, he has his own observations on this Asian powerhouse whose development is complicated by a fast changing relationship among world powers.
The following are edited excerpts from the interview which took place during the sixth China Inbound and Outbound Forum hosted by the Center for China and Globalization.
CGTN: Where does China stand in today's world?
Seong: The first phase of the opening and reform policy was a huge success. China has achieved a global scale in many of the dimensions related to China and the world's relationship. China is already the largest trading nation of goods; China is already the largest economy in the world in terms of GDP on PPP basis. But at the same time, we see there's a lot of room for China to continue to deepen its globalization and the global relationship and integrate further with the global economy.
Let's take companies as an example. China has a lot of Fortune 500 firms, almost as many as the U.S. has. At the same time, the degree of globalization of Chinese firms is still much less than their global benchmark – only about 20 percent of the revenue of Chinese firms generates revenue outside of China compared to 40-50 percent in the S&P 500. Another example is capital market. China has built a huge banking system, the largest banking system, second largest bond market and third largest equity market in the world. But then we see foreign participation is fairly limited – somewhere between two to six percent. If you think about technology, China invests a lot in terms of R&D. It invested about 290 billion last year – second largest in the world. But then influence of China's technology in the world is still relatively limited. China imported intellectual properties that were six times greater than IP exports. Data show China has 800 million internet users, which is larger than the sum of EU and U.S. internet users. But then if you look at cross-border data flow, it is only about 20 percent of the U.S.', maybe comparable to the level of Singapore. If you look at culture, China has invested a lot to build soft power – the Confucius Institute and also their box office. China's box office is the second largest in the world. But then if you look at the export of Chinese TV drama, it's only one-third of the Korean TV drama. So we think China achieved a lot in terms of building global scale from the opening and reform policy but there's still a lot of room for China to continue its globalization and further integrate with the global economy.
CGTN: What happened to the bilateral ties between China and the U.S., and also to the entanglement among China, the U.S. and the world?
Seong: We believe that there's a structural change in terms of the relationship between, China, the U.S. and the world. We measure the mutual exposure between China and the world based on trade, capital and technology. We found out on a relative basis, the world's exposure to China has constantly increased in past decades, whereas China's exposure to the world peaked around 2007 and subsequently declined. That means China is becoming an important market for the world, important supplier to the world and an attractive investment destination to the world and an influential investor for the world. Whereas China's own growth is increasingly driven by its own people. If you look at the GDP growth last year, about 70 percent of the GDP growth comes from domestic consumption. At the same time, China is developing its own local supply chain. If you look at PC and electronics industry for example, China used to export 55 percent of the domestic output of those sectors. Today, they are only about 28 percent. So China is growing its domestic supply chain to serve its domestic market. These are structural changes and we think the trend may likely to continue.
The uncertainty in global economy is likely to remain and we believe that China and the world are facing choices. One choice is to deepen collaboration; another choice would be weakened relationship and face more conflicts. Depending on the choices China and the world make, substantial value would be at stake. By 2040, we think that maybe 15-25 percent of the global GDP could be at stake. But the good news is that there are a lot of opportunities for China to collaborate with the world. For example, China can become a more important import destination, both for the developed economies and developing countries. China can open up more of its service and financial sector where China still has a productivity gap – it has only about 20-50 percent of the OECD average productivity level. There are also a lot of world agenda where China and the world can collaborate. For example, filling the infrastructure gap or addressing climate change, and ensuring the mutual flows of innovation so the world can benefit from the competitive output of China. At the same time China can benefit from the constant influence of the global technology, especially related to core components. Depending on the choices that China and the world make, huge values would be at stake.
CGTN: How can companies respond to a global landscape that's becoming more complicated?
Seong: First of all, they need to think about their exposure to China. The changing relationship between China and the world is structural. Therefore the volatility and uncertainty are likely to remain. Companies need to consider their exposure to this changing relationship, not just in terms of trade, but also technology, people, capital, culture and so on. Based on that, they can determine their strategic posture, whether they want to triple down their investment in China or if China is just a market they want to target. Then, perhaps it is time to diversify their portfolio. Another important element is enhancing their operational excellence and risk management capability. This is because operational mistakes can quickly escalate and become a big issue in the current environment. Finally, adapting a survival mindset and look for more opportunities to restructure the business in China. China was largely immune from the economic crisis, including the Asian financial crisis in 1997, the dot-com bubble in 2001 and the global recession in 2008. If something happens, it will be the first time business leaders in China will experience some real turbulence, and that could create some acquisition opportunities.