NEWS

Trends in China Manufacturing and Service Sectors

March 07th,2019 Posted by Will Mac Kay

Since the 1970s, the Chinese economy has morphed from a bolted, centrally controlled system to an increasingly market-centric one that dominates the global market particularly because China is the world’s leading exporter. Reforms pursued by the government eliminated collective agriculture and grew to encompass price liberalization, independence in state enterprises, fiscal decentralization, private sector expansion, foreign investment and trade, and stock market development. China now enjoys an enviable position as a dominant economy that is poised to surpass the US in the near future. The country’s economy is primarily dependent on two economic segments: industrial manufacturing and the services sector. This analysis delves into the trends registered in both sectors as well as the factors influencing growth and slumps in the two core segments.

Manufacturing Sector

China’s manufacturing sector has undergone tremendous growth ever since the initiation of economic reforms. China ranks first globally in industrial manufacturing output and is currently the leading manufacturer of steel, cement, and chemical fertilizers in the world. Core industries in the nation include mining, steel, iron, coal, machinery, textiles and apparel, cement, food processing, fertilizers, transportation equipment, electronics, automobiles, among others. Before the advent of trade liberalization and economic reforms in China more than 40 years ago, the country mainly pursued “policies that kept the economy very poor, stagnant, centrally controlled, vastly inefficient, and relatively isolated from the global economy” (Morrison, 2018). At the time, most industrial output was manufactured by state-owned corporations. Because of the economic reforms and trade liberalization pursued by Beijing from 1978, there was an exponential rise in production by firms financed by local authorities and over time, by foreign investors and private entrepreneurs. Ever since the country opened up to foreign investment and trade, China has transformed into one of the most vibrant economies and the world’s leading exporter. By 1980, the perception of China as a largely low-cost production hub gained traction as the nation became an inexpensive manufacturer for global brands. It is worth noting, however, that this perception is changing as the country’s economy grows and the currency becomes stronger. Rising labor costs as well as an ageing force have hurt manufacturers’ profit margins. Even though cost rationalization continues to be an appealing feature associated with the Chinese market, multinationals and local enterprises have started to reorient their strategies to tap China’s growth prospects.

In recent times, the Chinese manufacturing sector has posted fragile growth patterns even registering historic. In 2017, for instance, industrial manufacturing accounted for 40.5 percent of China’s GDP down from 46.8 percent in 2010 (Inman, 2018). China’s manufacturing output growth and retail sales slowed in November and December, 2018 (Inman, 2018). The country’s short-term outlook appeared to be particularly bleak as Beijing weathered multiple headwinds such as dwindling exports occasioned by US-imposed import tariffs, overcapacity in heavy industries as well as an overpriced currency (Inman, 2018). In December, Chinese officials recounted surprisingly fickle growth in monthly retail sales as well as industrial production that impacted global markets and reduced the S&P 500-stock index by up to 1.9 percent (Bradsher & Tang, 2019). On paper, as is often the case, the Chinese economy appears to be doing fine but in reality, a sharp slump is building (Bradsher, 2019). Some indicators of this bleak short-term future include reduced foreign investment, auto sales that have dropped by record percentages, and a roiling real estate market. Establishing the scale of the slowdown is problematic due to the undependability of the country’s economic data (Bradsher & Tang, 2018).

In response to the slump witnessed in manufacturing, China has initiated a set of strategies such as loosening credit controls in order to ensure that borrowing remains cheap, but this has not led to a rise in output (Inman, 2018). Even so, the state’s tight hold on key industries as well as the financial sector actually gives it “more levers to pull in case of a downturn than practically any other country” (Bradher & Tang, 2018). Already, Xi Jinping’s administration has used the kind of government-driven expenditure that initially bailed out the economy, while regulators have ordered financial institutions to increase lending to private businesses. The government is also compensating businesses for not laying off employees and lessening environmental controls. What is more, Xi Jinping is engaged in negotiations with the US to resolve the Trump-led US-China trade war that has had a direct, adverse impact on the manufacturing sector. Whether these raft of strategies will prove fruitful is something that remains to be seen.

Service Industry

The Chinese service sector has experienced strong growth, but it remains relatively smaller than is typical for an economy at the country’s economic development stage. There is a need to unlock the limitless potential of the segment in order to shore up the business sector, foster trade, strengthen jobs creation, accelerate the use of advanced management, and to heighten overall economic efficiency. China started to tackle the neglected services segment in 2001. The country is committed to an increasingly proactive opening-up approach in core services sub-sectors including logistics, healthcare, finance, education, high-tech services, and is aspiring to sustain its dominance as a top global exporter for construction, tourism as well as transport. As the country strives to move away from traditional growth drivers, this sector is now considered a fundamental growth engine that propels the economy amid external headwinds and uncertainties.

In spite of economic complexity witnessed both domestically and abroad, an expanding service segment has substantially shored up China’s growth. It is currently the national economy’s largest sector. The services sector accounts for more than 50% of China’s economy and increasing wages are giving domestic consumers greater purchasing power both at home and abroad. As of 2017, the service sector accounted for 51.6% of China’s GDP along with 44.9% of aggregate employment (Xinhua, 2018). The Chinese service segment started off quite well in 2018, growing at the fastest speed in nearly six years as the market experience a surge of new orders (Qiu & Woo, 2018). According to economists, the growth was attributable to improved access to loans in 2018 as well as strong demand (Qiu & Woo, 2018). In 2017 and much of 2018, Chinese firms in the service sector witnessed stronger profit increment due to growing demand for services as well as predictable price rises (Xiang, 2017; Qiu & Woo, 2018). The profit growth registered in the sector was much faster than what was reported in the industrial segment in spite of major economic indicators projecting a contraction (Xinhua, 2018). The fast rise in demand for Chinese services has culminated in a stable price rise, which resulted in to the exceptional growth of corporate profitability in the segment (Xiang, 2017). As a result the Caixin/Markit services sector purchasing managers’ index grew to 54.7 in January, which was the highest reading in six years. In the first half of 2018 output in the service sector increased 7.6% year on year, accounting for up to 60.5% of the overall growth in the period (Xinhua, 2018). In essence, this was a whole 23.8 percentage points over the growth attributable to the secondary sector according to official data (Xinhua, 2018). Against the backdrop of strong performance in the non-manufacturing industry, China’s GDP grew by 6.8% year on year in the same period, which was well above the annual state growth target of 6.5% (Xinhua, 2018).

The surging trend is in perfect alignment with the country’s massive economic reorientation that entails quality development. In essence, this is meant to transform the economy, once heavily dependent on exports and fixed-asset investment, into a consumption-centric and service growth pattern. The upbeat economic performance, which was affirmed by official measurement of the non-manufacturing segment, conforms to China’s long-term aspiration to overhaul its economic growth model (Qiu & Woo, 2018). The state hopes that solid growth in services and consumption, especially in high value-added sections like technology and finance will tip the scales and decrease overreliance on heavy industry, exports, and investment (Qiu & Woo, 2018). Even so, much if the government’s focus and investment is directed toward the roiling manufacturing sector at the expense of exploiting the unharnessed potential of the Chinese non-manufacturing segment. The expectation is that once the economy recovers from the headwinds that hurt the industrial sector in 2018, more emphasis will be placed on expanding the service sector.

Conclusion

In a nutshell, the Chinese manufacturing and service sectors are key economic drivers. The service segment has registered strong performance in recent times, but this trend has not been replicated in the industrial manufacturing sector. The former largely benefits from rising demand as well as predictable market trends in spite of domestic and external headwinds. However, the latter is roiling under adverse trends like the Sino-American trade war, overcapacity, labor costs, and an increasingly strong currency.

References

Bradsher, K. & Tang, A. (2018). China’s economy slows sharply, in challenge for Xi Jinping. The New York Times. Retrieved from https://www.nytimes.com/2018/12/14/business/china-economy-xi-jinping.html.

Inman, P. (2018). Global economy fears rise as manufacturing growth slumps in China. The Guardian. Retrieved from https://www.theguardian.com/business/2018/dec/14/global-economy-fears-rise-as-manufacturing-growth-slumps-in-china.

Morrison, W. M. (2018, February). China’s economic rise: history, trends, challenges, and implications for the United States. Library of Congress, Congressional Research Service.

Qiu, S. & Woo, R. (2018). China’s service sector grows at fastest pace in nearly six years in January: Caixin PMI. Reuters. Retrieved from https://www.reuters.com/article/us-china-economy-pmi-caixin/chinas-service-sector-grows-at-fastest-pace-in-nearly-six-years-in-january-caixin-pmi-idUSKBN1FP04V.

Xiang, Li. (2017). Service industry leads China’s GDP growth. China Daily. Retrieved from http://www.chinadaily.com.cn/business/2017-11/15/content_34549893.htm.

Xinhua. (2018). Economic Watch Service industry steering China’s firm growth. XINHUANET. Retrieved from http://www.xinhuanet.com/english/2018-07/30/c_137357795.htm.