China's manufacturing sector, once a global go-to hub, is facing significant challenges that could have significant consequences for the Chinese economy and the rest of the world.
Recent declines in factory orders, compounded by the disastrous Zero Covid policy, have sent shockwaves through the industry. Reports of young people struggling to make ends meet and job losses are biting deep for the 900 million blue-collar workers in China.
As China's GDP growth in 2020 was the worst in a generation, the ongoing tensions with the US, trade tariffs, sanctions, and growing political risk have led to many companies slow-walking out of the country.
Read below the main reasons for companies leaving the country, and what could be the impact around the world.
Reasons for Companies Leaving China
The reasons for companies leaving China vary by sector.
In response to US tariffs on Chinese imports, solar and home furnishing industries set up shop in Southeast Asia in 2013. Chinese companies are also investing in Southeast Asia to avoid trade tariffs, sanctions, and political risks associated with doing business with China.
This trend is tearing at the social contract between the CCP and the Chinese people and risks losing China's place as a go-to manufacturing hub.
Impacts on China and the Rest of the World
The shift in China's manufacturing industry is causing significant consequences, not just in the country but globally. The rise of the Chinese manufacturing industry has brought many changes to China, and poverty has been significantly reduced. However, the recent changes have created uncertainty for Chinese workers.
If China's manufacturing market share decreases, people's livelihoods could be in danger, leading to social unrest and protests.
For the US, bringing back manufacturing to the country or protecting American industries is critical. The recent shift in China's manufacturing industry could benefit Southeast Asian emerging markets, which can attract Chinese and Western capital to build factories and hire locals.
Reshoring some production is also good for American manufacturing, which hires blue-collar workers affected by US trade policies favoring offshoring.
What are the Risks Afterall?
If every day the life of Chinese people is in trouble, they will push back, and the Chinese government may see such uprisings as something the Americans caused. This could lead to geopolitical tensions and even war, which would be bad for everyone.
In conclusion, the shift in China's manufacturing industry is causing significant changes both in China and globally.
The Chinese government needs to take measures to maintain its manufacturing industry, or it could lead to social unrest and protests, and the US needs to bring back manufacturing to its country or protect its industries, as this is critical for its economic growth.
Investors who specialize in macroeconomic trends need to pay close attention to the shifting landscape in China in the coming years. As the country increasingly turns inward, focusing on building its domestic consumer market, these investors will have to stay abreast of developments to understand how successful China will be in this effort.
They must also keep a close eye on China's progress in achieving its goals, as any significant changes could have far-reaching consequences for global markets.