India won’t be replacing China as world’s factory any time soon

South China Morning Post has published an article arguing that China’s manufacturing has rebounded and remains a vital part of the global supply chain with dominance in key sectors. Caliber.Az reprints the article.

Will China’s meagre growth last year be the beginning of the end of its dream to overtake the United States as the world’s largest economy? Forecasts of when this is expected to happen have been pushed back, to 2035 from around 2030, after China’s economic slowdown over the last few years.

However, this year, China is pulling out all the stops to resume economic growth after ending its zero-Covid policy in early December. Last month, its manufacturing activity rebounded to the highest in more than a decade.

While it may still take some time for China to get its economic engine going at full steam again, the country can confidently expect to continue to be the world’s factory for now.

At the start of the pandemic, China focused on curbing the spread of Covid-19 and saving lives, especially those of the unvaccinated elderly. But its zero-Covid policy also wreaked havoc on its economy, disrupting both supply and demand for industries ranging from consumer durables to consumer non-durable goods.

The unpredictability of lockdowns in many cities disrupted not just the lives of tens of millions of people, but also crucial supply chain operations. As China’s supply chains became less reliable and geopolitical tensions between the US and China intensified, some multinational firms started to shift their production bases away from China.

Google has reportedly been moving some production for its latest Pixel phone to Vietnam while Apple’s latest iPhones will increasingly be made in India. Amazon is also making Fire TV devices in India, while Microsoft has reportedly been shipping Xbox game consoles from Vietnam.

With declining supply and demand, China’s economy grew by a slow 3 per cent last year. Such growth rates, which include the anaemic 2.2 per cent in 2020, the first full pandemic year, are unprecedented since national economic reforms began in 1978. And despite China’s shrinking population, youth unemployment surged to a high of nearly 20 per cent last July.

The government became keenly aware that the zero-Covid policy needed to end quickly to rescue the economy and boost employment. Once the extremely contagious Omicron variant was found to be much less lethal, China’s economic reopening took on greater urgency.

China took the world by surprise in abruptly ending zero-Covid last December, and by January, Vice-Premier Liu He was at the World Economic Forum assuring foreign investors that China was open for business.

In preparing for China’s economic kick-start, herd immunity was important, whether through vaccinations or infections. Barely a month after the end of Covid-19 restrictions, an estimated 80 per cent of the population had been infected, and just 60,000 had died.

As factories quickly resumed operations, the world is now in awe of China’s supply chain resiliency. The rebound in manufacturing and services activity has inspired optimism in many analysts and investors. Asset manager Schroders, for one, has raised its forecast for China’s economic growth to 6.2 per cent this year, from 5 per cent.

Some investors remain concerned about China’s long-term economic growth and some Western firms have continued to diversify away from China so their supply chains are less dependent on it. Yet beneath the surface, China has continued to play an important role in global supply chains.

Last December, shipments from China to the US shrank by 19.5 per cent, while those to the European Union fell by 17.5 per cent. But China’s trade with Asean grew by 15 per cent last year, and most of the imports by the Association of Southeast Asian Nations were thought to be destined to be exported to the US, via transshipment.

Transshipment is a supply chain strategy that allows Chinese exporters to ship their products to a country subject to lower US tariffs, change the country-of-origin label without substantially altering the products, and then export those goods on to the US.

Vietnam, for instance, imported US$110 billion of goods from China and exported US$96 billion of goods to the US in 2021, suggesting that much of what Vietnam imported was intended for eventual export to the US.

Direct shipments from China to the US may be falling, but it would seem that indirect shipments from China through Asean members such as Vietnam and Indonesia are on the rise.

While India, China’s regional economic rival, enjoys support from the US and the Indo-Pacific Economic Framework launched – with over a dozen initial partners including India – last year, China has led the effort to establish the Regional Comprehensive Economic Partnership free-trade agreement with 15 signatories.

It is interesting to note that many Asean members, such as Vietnam and Indonesia, are members of both initiatives, and can probably expect to benefit commercially from the geopolitical tension between the US and China.

India may be leading in software development, but China has prowess in developing both hardware and software. As China continues to dominate the production of components for electronic parts, solar panels and lithium batteries, no country can hope to displace China as the world’s factory any time soon.