Don’t Count China Out: The Dragon’s Rise in Manufacturing and Tech

TK Arun

There is reason to believe that China is transitioning to a more mature stage of economic growth through manufacturing and tech, rather than going down a slope of decline. It would be wrong for India to fashion plans based on any assumption of Chinese economic decline.

China is the world’s most competitive producer of electric cars, lithium-ion batteries and solar panels.

Is the Chinese growth story over? Former banker Uday Kotak has issued a warning of Chinese implosion on X (formerly Twitter), rating agency Fitch has put a negative outlook on Chinese prospects, and China’s growth rate for 2024 is forecast to come in at 4.8 percent by the Asian Development Bank, a shade lower than the Chinese government’s own target of 5 percent. Over the next 10 years, 300 million are going to move out of China’s working age population, as they age. And the overall population is shrinking,

Is the dragon past its prime, and should the elephant prepare to race past this huffing and puffing mass of wiggly hubris? Not so fast. There is every reason to believe that China is transitioning to a more mature stage of economic growth, rather than trudging down a slope of decline. It would be wrong for Indian companies or the government to fashion plans based any assumption of Chinese economic decline.

US’s Factory Capacity Warning to China

US treasury secretary Janet Yellen has just completed her second official visit to China. Her mission was to persuade China to stop destroying jobs in the US by building up excess capacity and flooding the world market with everything from disposable nappies to snazzy electric cars.

Janet Yellen is a diminutive economist, not Tom Cruise in drag; and so, this particular Mission Impossible lived up to its name, instead of succeeding against all odds. Chinese officials politely refused to assure her that Chinese companies would cut back production so that less competitive American companies could continue to inflict avoidable costs on consumers around the world.

What China’s Numbers Say

China is the world’s most competitive producer of electric cars, lithium-ion batteries and solar panels, dubbed the “New Three industries”. In 2023, their exports went up 29.9 percent over the previous year, even as overall Chinse goods exports shrank 4.6 percent, to a mere $3.38 trillion.

Capacity utilization in China’s overall manufacturing is 75.9 percent, not far below the figures of 78.9 percent for the US and 78.8 percent for the EU, according to Reuters. This does not paint a picture of China building up enough capacity to make manufacturing redundant in the rest of the world. The charge that China is subsidizing its industries sits ill in the mouths of the US and EU, which are pumping hundreds of billions of dollars as subsidy into their own manufacturing capability, particularly in high-tech sectors.

The US leads the world in shovelling subsidy at favoured industries. The Infrastructure Act, the Chips Act and the Inflation Reduction Act of the Biden administration are meant to incentivise investment into the sectors that the government thinks are vital for long-term economic, indeed, strategic, advantage. The trillion dollar subsidy bill of such industrial policy is financed, in part, by higher taxes. This amounts to the state deciding how resources generated by the economy should be invested, instead of leaving the choice to companies.

This invites the charge of statism from ideologues, who proliferate in the real world, unlike untrammelled market forces that tend to choke up die outside the rarefied models of textbooks. However, on the ground, new chip-making foundries, battery plants, electric car production lines, and even a carbon dioxide removal plants are sprouting, in an unexpected American manufacturing resurgence.

Chinese industry, on its part, does not just guzzle subsidy. It also shows rare entrepreneurial energy.

Manufacturing the New Buzz Word

Droves of Indian industrialists and policymakers go to Davos every year, and come back spouting the latest buzzwords. Manufacturing 4.0 has been a favourite for some years. Indians who come back from Davos show off their newly acquired knowledge at industry gatherings. Chinese returnees install robots on the factory floor.

The International Federation of Robotics compiles data on robots In 2022, the world’s stock of industrial robots stood at 3.9 million, after adding 550,000 robots that year. Of these, 290,000 robots were installed in China, 52 percent of the total. In 2012, China accounted for 14 percent of that year’s addition of robots. China’s world class 5G networks, and Artificial Intelligence capability, there is no reason to believe that this combination of robots, communication networks and AI would not offset, to a large extent, the impact of a depleting workforce on China’s manufacturing prowess.

China Rises in the Tech World

In the pandemic year of 2020, patent applications dropped off in the EU, US and Japan but kept climbing in China. In the number of international patent applications made via the Patent Cooperation Treaty (PCT) China overtook the US in 2021, and has increased that lead since. PCT Yearly Review 2023 shows that in 2022, China filed over 70,000 patent applications, 10,000 and 20,000 more than the US and from Japan respectively. India’s count was 2,618.

The first Chinese built airliner, dubbed C919, a competitor to the Boeing 737 series and the Airbus A320 series of aircraft, made its first commercial flight for China Eastern Airlines last year.

Chinese state support to a decelerating economy has, this time around, departed from a big boost to infrastructure. Reuters quotes Zhao Chenxin, deputy head of China’s National Development and Reform Commission, to say that the plan is to boost equipment upgrades at Chinese enterprises totalling $690 billion and to incentivise consumers to trade in old consumer goods, including cars, for new ones, a market estimated at $140 billion.

China is building up its high-tech industry, and evolving away from being a producer of just mass market goods. At $18 trillion, today’s Chinese economy should not be expected to grow at the same blistering pace as in the past. That does not mean the economy is about to implode.

TK Arun is a senior journalist.

The article was first published in Moneycontrol as Bet on Chinese economic decline at your own peril on April 13, 2024.

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.

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Acknowledgment: This article was posted by Aasthaba Jadeja, a visiting researcher at IMPRI.