McKinsey, the management consultancy, is recirculating a recalculation it published last September of the value of China’s exports that strips out the value of imported components and semi-manufactures that get assembled into final export products. It is worth another look at the exercise, which was intended to create a truer picture of the dependency of China on exports for its economic growth and thus take a better measure of the strength of the shift to domestic demand now underway.
Arithmetically, what McKinsey calls domestic value-added exports will have to be a smaller percentage than the standard export numbers show (unless Chinese export manufacturers destroy value), so the interest lies in the scale of the reduction. What the firm found is that domestic value-added exports contributed 19%-33% of total GDP growth from 2002 to 2008, almost half the contribution indicated by the conventional numbers. So exports are an “important” but not “dominant” contributor to growth, McKinsey concludes.
One other inference to be drawn from the calculations is that China’s export manufacturers are moving up the value chain and becoming less pure assemblers, which is in line with the observable evidence. “If your company is a manufacturer in China that is primarily processing intermediate components for reexport…it’s probably time to consider alternative locations for the assembly work,” McKinsey advises.