[By David Uren]
Analysts are expecting China’s economic output in the first three months of 2021 to be 15 percent to 18 percent higher than in the same period in 2020 when the coronavirus struck, highlighting the enormous power and resilience of the country’s vast manufacturing sector.
Perhaps the biggest economic surprise of last year was the strength of China’s economic recovery, despite it having been the first to suffer the pandemic.
While the Chinese economy fell sharply in the first quarter of 2020, contracting by 6.8 percent, it has been recovering strongly since June and full-year figures to be released next week are expected to show growth of around 2 percent.
A review of economic forecasts by the Chinese financial newspaper Caixin suggests that after a strong bounce-back in the first quarter, the country is headed for growth of between 8 percent and 10 percent over the course of 2021.
While global trade remains deeply depressed, with the World Trade Organization’s latest forecast suggesting a 9.2 percent decline for 2020, China’s exports have been growing stronger every month since June.
Trade figures show that the value of China’s exports in November was 21 percent above the pre-pandemic level in the same month in 2019, led by an extraordinary 45 percent increase in sales to the United States.
Monthly figures are volatile, but China still managed to lift exports over the full year despite the global recession. China’s December trade report, to be released on Friday, is expected to show a surplus in 2020 of more than $500 billion.
China’s manufacturers benefit from an immense internal market delivering unrivalled economies of scale. At the same time, productivity gains are coming from the adoption of advanced manufacturing systems, an increasingly educated workforce and fully developed local supply chains.
A 2018 report on Chinese manufacturing by management consultancy BCG reported that China’s factories are generating more value added—$3.7 trillion in 2017—than those of the Germany, South Korea, the UK and the US combined.
It found that China accounted for 27 percent of global manufacturing value added, which was 1.7 times more than the US, 2.8 times more than Japan and 4.4 times more than Germany.
China’s strong performance over the past year while the rest of the world was mired in managing the pandemic would have increased its dominance.
Rising labour costs, which have been increasing at an average of 15.6 percent a year, have eroded some of China’s edge in traditional industries, but its advantages of scale are overwhelming.
For example, Chinese clothing exports rose by a third to $145 billion in the decade to 2017, despite fast-rising wages. Exports of competitor nations in the clothing sector—Vietnam, Bangladesh, Indonesia, India and Thailand—also rose strongly over the period, reaching a combined $88 billion, but almost none of those sales went to China. The competitive advantage delivered by China’s domestic market was untouched.
These trends are increasingly evident in high-technology industries. China has surpassed South Korea as the largest manufacturer of flat-screen TVs and produces more than 90 percent of the world’s smartphones. Its automotive factories now deploy as many robots as those in the US.
Chinese companies benefit from highly networked clusters. Automotive and electronics clusters are increasingly important in Chongqing, smartphones come from Shenzhen, and a quarter of the world’s optical fibre comes from Wuhan.
As BCG comments, ‘The breadth, efficiency, and vertical integration of Chinese supply chains is a major reason why little production of goods ranging from smartphones to chemicals has gone offshore, despite rising costs.’
Indeed, the trend over the past decade has been for Chinese companies to bring elements of production that had been spread across Asia back onshore. The share of regional trade that forms part of value chains declined from 55.4 percent to 48.7 percent over the decade to 2017. It is a trend which members of ASEAN hope that the recently concluded Regional Comprehensive Economic Partnership trade deal will reverse.
The vitality of Chinese manufacturing helps to explain why foreign businesses that have successfully established themselves in the Chinese market are so reluctant to withdraw. In the latest survey by the American Chamber of Commerce in Shanghai, only 5 percent of companies with global revenues over $500 million said they had plans to relocate operations out of China, despite the heavy tariffs that Chinese-made goods now face entering the US.
Chamber president Ker Gibbs told the South China Morning Post that members were aware of the national security issues but were “dedicated to the market, which is attractive, large and growing.”
China is increasingly the irreplaceable supplier of many of the staples of modern consumer and industrial life. A survey by Japan’s Nikkei data team found that of 3,800 internationally traded products, China held a market share of more than 50 percent in 320 products. When China joined the WTO in 2001, it held a dominant market share in just 61 products.
For example, China accounts for two-thirds of the global export market for small computers. Its share of liquid crystal components is above 50 percent, and it has higher shares in the global traded markets for air conditioners, ceramic washstands and toilet seats.
Suppliers to the Chinese economy are benefiting from its dynamism. These include Australia, notwithstanding China’s steps to roll back Australia’s gains under the China–Australia Free Trade Agreement. Australia’s exports to China are still double the level of just the four years ago. Other prominent suppliers to China, including Taiwan and South Korea, are also gaining. However, the weight of advantage rests heavily on the Chinese side both in the Asian region and globally as China’s economy grows more powerful relative to everyone else’s.
China’s economy has its flaws— burdened by heavy debts, inefficient state-owned enterprises and an ageing population—but it is going into 2021 brimming with economic self-confidence. The pride that Chinese feel about their economic performance will be matched by rising resentment among those displaced by the inroads Chinese goods are making in global markets. It is a recipe for global trade tensions in the year ahead.
David Uren is a non-resident fellow with the United States Studies Centre at the University of Sydney.
This article appears courtesy of ASPI’s The Strategist, and it may be found in its original form here.
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