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China in the Asian century

By Jonathan Woetzel and Joe Ngai | China Daily Global | Updated: 2019-09-19 09:35

China’s economy is maturing, innovating, and increasingly playing the role of anchor to Asia, the world’s largest regional economy. Even as China’s growth rate matures, it is still adding the size of the Australian economy every year, and its growth is helping to propel the rapid economic development of its neighbors.

By 2040, Asia may account for more than half of global GDP. Most types of cross-border flow—from goods and services to capital and people—are shifting in weight toward the region. For instance, Asia’s share of global goods trade rose from 27 percent to 33 percent between 2007 and 2017. The region’s share of global container-shipping traffic increased from 59 to 62 percent over the same period, new McKinsey Global Institute research shows.

What is even more notable is how rapidly Asia’s economies are now integrating with one another—Asia is becoming more Asian. Around 60 percent of all goods traded by Asian economies are within the region, as is 59 percent of foreign direct investment, 74 percent of flights taken by Asians, and 71 percent of Asian investment in startups.

Increasing flows between Asian countries are creating powerful new networks. Three in particular—industrialization, innovation, and cultural and mobility—stand out. And China is a key enabler of the rise of Asia as a networked and connected regional power. China is a regional—and global—trade platform. It is now the largest trading partner for Malaysia, the Philippines, and Singapore, for instance. About 60 percent of China’s imports come from the rest of the region. Large new trade corridors have developed across the region and of the 25 fastest growing between 2000 and 2017, only eight did not involve China or India. China can also be a major market for the rest of Asia. Its consumption growth is expected to be nearly double that of all ASEAN economies in the period to 2030, and this offers rich opportunities for other Asian economies to export to China.

In addition, China is a major investor in the rest of Asia, accounting for 35 percent of outbound Asian FDI in 2013 to 2017 . Its tech companies are active investors in Asia’s emerging economies and India. For example, in 2017, Tencent led a $1.2 billion investment in Indonesia’s ride-hailing company Go-Jek. Alibaba has invested $4 billion Lazada, Southeast Asia’s largest ecommerce platform.

China is also a major source of Asians on the move. Asia has accounted for more than 50 percent of worldwide growth in air passengers over that period, and is home to more than half of the world’s largest airports. Asian tourism is booming and China is a big reason why. Significant travel corridors have developed between China and Thailand and China and Japan, for instance. The number of tourists travelling between these pairs of destinations has grown by 29 percent and 7 percent over the past decade. Spending by Chinese tourists is very significant—in Singapore and Thailand, this is equivalent to 7 and 9 percent of total private consumption, respectively.

Asia’s economies are diverse—they are at different stages of economic development, and are connected to varying degrees. But the strength of the Asian economic mix is that these different economies tend to complement each other. So as China has shifted toward more knowledge-intensive manufacturing as its innovation gathers pace and labor costs rise, so Chinese companies have been able to move their manufacturing operations to lower-cost locations such as Vietnam. Nike, for instance, has manufactured more of its product lines in Vietnam than in China since 2009, and Adidas followed suit in 2012.

The stage is set for more growth, more integration, and inexorably spreading Asian supply chains and networks. There is still work to be done to maximize the region’s potential and facilitate closer links beyond trade. The Regional Comprehensive Economic Partnership, for instance, has started to include additional elements such as investment, intellectual property, and dispute resolution.

There are many areas in which China can lead and contribute. China can become an even greater destination for the exports of other Asian economies. It is already the largest source of outbound people flows including students and tourists, but inbound flows are much smaller. China is home to the world’s largest population of internet users, but its cross-border data flows are still only comparable with those of Singapore. Stronger regional cooperation—political as well as commercial—would help cement the stability and dynamism of the new Asia. China’s engagement should not come at the expense of the region’s global engagement but provide a turbocharge for its development.

There are major challenges ahead for Asian economies – challenges which can also be met through greater regional integration. There is financial stress in some markets. Debt is growing. Since the 2008 crisis, China alone has accounted for more than one-third of growth in global debt, rising more than five times over the past decade along to reach $29.6 trillion by mid-2017 or 246 percent of GDP. Pressure on the environment is an issue concerning all countries in Asia and beyond. Measured by concentration of fine particulate matter PM2.5, 12 of the 20 most polluted countries in the world are in Asia. China accounts for 28 percent of global carbon emission but is also a major investor in renewables. Many countries face skills gaps that need to be plugged; on this front, China is relatively well placed. It is the world’s largest source of outbound students but could do more to attract world-class, entrepreneurial talent from around the world.

Regional integration provides resiliency – crises that might overwhelm a single country will be met by a collective purpose and capacity to respond. These are exciting times for China and its neighbors. There is much that is impressive about this region’s development: robust growth, complementary capabilities, dynamic new networks, and the opportunities that come from collaboration among countries.

Jonathan Woetzel is a director of McKinsey Global Institute and senior partner of McKinsey & Company; Joe Ngai is the managing partner of McKinsey's Greater China Region and senior partner of McKinsey & Company. The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

China in the Asian century

(China Daily Global 09/19/2019 page13)

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