China’s industry and manufacturing dimension is a textbook example of a sector that has experienced tremendous growth, with output having risen more than 300% over the past 10 years and currently sitting well north of 100 trillion CNY. Despite its impressive size and the fact that it accounts for almost 50% of global manufacturing output at this point in time, growth is slowing down… or, one might actually state that the growth rate is slowing down precisely because such robust growth cannot continue indefinitely, something that anyone with a basic grasp on arithmetic can understand.
When it comes to the sub-sectors of the industry and manufacturing sector, not much has changed with respect to what the top 10 are over the past years: metal production, electrical/electronic production, chemical/pharma production, food/beverage production, automotive production, textile production, production of aggregates, electronic components and semiconductors, the production of equipment/goods and, finally, rubber/plastics production. Combined, these industries account for over 85% of China’s industrial output, with the grand total in monetary terms being in the 100 trillion CNY zone.
What is changing, however, is where demand comes from, as China is transitioning toward a status quo which revolves around internal consumption making up more and more of the total pie. It’s time to finally put myths surrounding China’s over-dependence on exports to the US to rest. Let’s just say that at this point in time, social retail sales account for over 35 trillion CNY, whereas US exports are barely in the 3 trillion CNY area.
Even more so, industry and manufacturing sector-related exports have been considered the main driving force of China’s GDP growth despite reality painting a different picture. No, China’s GDP is not growing primarily thanks to its exports but rather as a result of its massive infrastructure spending. For example, in just two years, China has used more cement for its various infrastructure-related projects (internal infrastructure, mind you) than the United States has used throughout the entire 20th century.
That’s not to say exports don’t have their role in the Chinese growth equation. They do, just not the dominant one. We need to understand that China plays by different rules than most other countries due its sheer population size. As the economy of a country the size of China grows and the needs of 1.4 billion citizens who are becoming increasingly affluent have to be met, the infrastructure requirements alone are more than enough to bring about massive GDP growth.
Please keep in mind what the GDP measures, which is the amount of money that is generated through the economic activities of all entities COMBINED within a country’s borders. Next, understand that the various trends that have taken place in China since the 1978 reforms all came with all sorts of infrastructure requirements. For example, as mass exodus has taken place from rural to urban areas, a wide range of logistics-related questions emerged. Where will all these people live? How will their consumption habits change after relocating? How will their consumption habits change as their income inevitably goes up? The list could go on and on. The answers to all questions ultimately end up revolving, in one way or another, around infrastructure spending. As such, again, when trying to articulate explanations with respect to China’s impressive GDP growth, keep your eyes on internal consumption-related infrastructure spending rather than exports.
Going back to the production dimension, however, it’s worth noting that the various trends which are unfolding in China bring about not just new infrastructure development but also the appearance and growth of a wide range of new industries. For example, if you thought the number one producer of solar and wind energy is the United States, Japan or perhaps Germany… think again, it’s China. The same way, it’s poised to dominate all sorts of other cutting-edge sectors such as electric vehicles, smart housing and so on.
As such, it’s time to put another myth to rest: that China is only capable of producing cheap low value-added goods. Not only is that not the case, the exact opposite is becoming more and more valid because China needs to focus on higher value-added goods at this stage of its economic cycle, as it moves away from simply being a source of cheap labor to having its own companies that dominate… domestically as well as abroad.
All things considered, today’s reality paints the picture of a maturing economy. An economy which, yes, used to be attractive for reasons such as companies being interested in wage arbitrage (establishing a presence in China so as to take advantage of its lower labor costs) but ended up moving on to Western models which revolved around investing in research and development so as to put a wide range of increasingly complex and most importantly high value-added products on the table.