- China’s economic headwinds have not shaken its position as a manufacturing powerhouse.
- Strategists don’t think other countries will displace China as the world’s leading manufacturer.
- The flight of foreign investment poses risks to China’s trade resilience.
China’s bearish headwinds range from the real estate crisis and deflation to weak consumer confidence and a collapse in stock prices. However, that does not necessarily mean that other countries will replace China as the world’s top manufacturing power.
There is little evidence of deglobalization despite worsening U.S.-China trade relations amid tariffs and geopolitical tensions, Eurizon strategists Stephen Zheng and Joanna Freire wrote in a note Monday. said.
Other countries such as Vietnam and Mexico (which surpassed China as the US’s largest trading partner in 2023) have been at the forefront of reshaping global trade flows.
By that point, China’s market share of total U.S. imports had skyrocketed, but Eurizon said that countries that had increased exports to the U.S. on China’s behalf were themselves importing more from China than ever before. He said he is doing so.
”[I]The United States may have ‘won’ this trade dispute, but China has not ‘losed’,” Zheng and Freire said.
China’s changing trade focus
The market share of Chinese exports in the United States has fallen from 22% to 14% since 2017, and the Trump administration’s policies certainly had the intended effect of discouraging direct imports from China.
Still, China remains the world’s largest exporter, with a global market share of about 15%, according to Eurizon.
Excluding the distorted levels of the pandemic, this is an all-time high.
Zheng and Freire said that despite tariffs and domestic headwinds, Beijing has achieved “remarkably successful” results by investing heavily in third-party countries from which the United States wants to import, such as Mexico and Vietnam. Stated.
Meanwhile, China has moved to export components to these countries for final assembly, allowing it to avoid U.S. tariffs on products assembled by China.
“In fact, China has increased investment and exports in recent years to the very friendly countries to which the United States is resourcing its imports,” Eurizon strategists said.
China was also able to increase exports to Europe, making up for the loss of direct goods to the United States.
“The next China” is China
Eurizon strategists remain skeptical that other countries will be able to supplant China’s role as the world’s dominant manufacturer.
Not only does China’s production capacity far exceed that of its rivals, but export prices in Mexico and Vietnam have increased by 30% and 31%, respectively, over the past three years.
“The fact that export prices have risen faster than general inflation is a remarkable fact in a period of strong dollar, and is likely due to stress on these countries’ manufacturing capacity, including a lack of adequate workers, infrastructure, and transportation. “We believe this is an indication of pressure,” Eurizon strategists said.
A number shows this point. China’s manufacturing workforce is approximately 212 million people, larger than the economies of the United States, European Union, Japan, Canada, South Korea, India, Mexico, and Vietnam combined.
It may be possible for the world to gradually move away from China, but smaller countries will not be able to cope with rapid changes that force them to become manufacturing hubs on a par with China.
“The bottom line is, is the ‘next China’ really China? No other country has the manufacturing capacity to replace China,” Zheng and Freire said.
Domestic headwinds
China may not be in danger of losing its trade position, but its economy continues to be tilted in the wrong direction.
“The post-pandemic economic recovery has been weak against a backdrop of weak sentiment, and China is digesting a long period of real estate overinvestment,” UBS strategists said in a note on Monday. It added that it was in the red. In Q3 2023.
In Eurizon’s view, the loss in foreign direct investment may have been accelerated by policy mistakes by the Chinese government in recent years. The downturn in the real estate market has reduced household assets, eroded consumer confidence and weighed on demand and spending.
All of this is reflected in the latest CPI report, which shows that the country’s deflation problem continues to worsen.
Meanwhile, Chinese stocks have significantly underperformed global stocks, reflecting the world’s bearish view of China.
“Overall investor sentiment toward China remains subdued today,” UBS strategists said. “Foreign capital allocations to Chinese assets have consistently declined, all of which has pushed Chinese stock valuations into very cheap territory.”
Zhen and Freire said the Chinese government can continue to use supportive and pragmatic policies to attract foreign investors back to China and help it eventually become the world’s largest economy.
“World attitudes toward China have changed as much as China’s own domestic policies,” they said. “In general, China has so far succeeded in maintaining its dominant position as the world’s leading manufacturing hub.”