Media: China faces "China shock" as low-cost manufacturing declines

China, once the world’s manufacturing powerhouse, is now grappling with the consequences of its own rise to dominance, a phenomenon dubbed the “China shock.”

Just over a decade ago, China’s booming manufacturing sector, bolstered by abundant cheap labor and highly efficient supply chains, made the country a key player in global production, especially in low-end manufacturing like footwear. However, the past decade has seen a shift in dynamics, with China’s share of global exports slipping and its once-thriving factories struggling to adapt, The Financial Times argues in a recent article.

Zhou Yousheng, who once employed more than 100 workers in his shoe factory in Guangdong, is a prime example of this shift. Today, his factory has fewer than 20 employees. "The future is bleak and hopeless if we continue like this," Zhou admits from his showroom in a nearly empty wholesale market in Guangzhou. The factory’s fate reflects the broader struggles faced by China’s low-end manufacturing sector, where wages have risen, and competition from Southeast Asian countries like Vietnam and Indonesia has intensified.

Despite still leading the global shoe production market, China’s share of footwear exports has dropped by 10 percentage points in the past decade. Analysts attribute much of this loss to the rise of rival manufacturing hubs, where production costs are lower, and supply chains are increasingly competitive. As a result, many Chinese factories now face a difficult choice: invest in automation, which reduces the number of workers but increases efficiency, or continue with labor-intensive methods and risk falling behind.

The transition away from labor-intensive industries is also being seen in broader manufacturing trends. A study of 12 labor-intensive industries from 2011 to 2019 revealed that employment in these sectors shrank by 14%, or roughly 4 million jobs. The textile industry, for instance, saw a 40% decrease in jobs over the same period. Further analysis covering 2019 to 2023 found a continuing decline of 3.4 million jobs in the same sectors.

Frederic Neumann, chief Asia economist at HSBC, explains, "China exploited its comparative advantage over recent decades in terms of having an abundant labor force, and it really became the dominant manufacturer globally of labor-intensive goods. That game is now up." This shift is raising concerns that China is facing a version of the “China shock” it once imposed on more developed nations. After China joined the World Trade Organization in the early 2000s, orders quickly shifted from expensive manufacturing hubs to China’s cost-effective factories. Today, however, countries like Vietnam and Indonesia are taking over much of that market share, as their lower labor costs and efficient manufacturing practices attract global businesses.

This transformation could have profound economic consequences. Western nations overcame the initial shock of Chinese manufacturing dominance by developing consumption-driven economies and service sectors. However, China’s path forward is more uncertain. Under President Xi Jinping, China has emphasized the importance of "new quality productive forces," such as advanced manufacturing and green technology. Yet, these sectors are less labor-intensive and are unlikely to absorb the millions of displaced workers from low-end industries.

Neumann warns that the shift to advanced manufacturing may not provide enough job opportunities to offset the losses in labor-intensive sectors. "You’re not going to employ as many people by definition," he says. Moreover, China’s leaders may struggle to meet ambitious growth targets, such as the “around 5 percent” growth set for 2025, without the robust manufacturing sector that powered its economic rise.

By Vugar Khalilov