China paves way for growth, reshaping trade, economy

The country’s economic advances in the years ahead will be defined as much by outbound investment as by domestic upgrading. They will be more about building ports, robotics and electric vehicles, and less about selling the toys, textiles and cheap electronics of earlier years.

Oxford Economics’ latest “Trade Forecast” research for HSBC paints a picture of how China’s trade – and by implication its economy – is going to evolve and grow.

Despite the current outlook for slower economic growth in the near term, Oxford Economics is forecasting a solid pace of growth in the coming decades. It suggests China’s rise up the economic value chain will support its transition to a consumption-led economy with a widening scope for export growth.

Driving these changes will be two centrepieces of economic policy: the “One Belt, One Road” initiative, focusing on China’s external trade and investment; and “Made in China 2025”, focusing on taking its domestic manufacturing capability to the next level.

The first maps out a plan to strengthen China’s economic relations with its trade partners, particularly its Asian neighbours, primarily via a network of transport and other infrastructure projects. The “Belt” refers to the traditional land-based Silk Road connecting central China via Central Asia to Europe, while the “Road” refers to the Maritime Silk Road encompassing Southeast Asia, Oceania and East Africa. The idea is to ensure that goods, services and capital can flow easily – which will in turn support domestic and external demand and help modernise the Chinese economy. 

It is estimated that US$11 trillion (Bt396 trillion) will be needed for urban infrastructure financing in Asia by the end of 2030.

Beijing has vowed to allocate an initial investment of $40 billion to set up a Silk Road fund for the construction of major infrastructure such as high-speed railways, bridges and ports in Southeast and Central Asia.

In addition, China recently launched a new supra-national financial body, the Asian Infrastructure Investment Bank, which has garnered support from 57 countries as founding members. Initially, the AIIB will have authorised capital of $50 billion, which will be raised eventually to $100 billion. 

Second, the “Made in China 2025” policy, announced on May 19, plans to promote advanced industries and move the economy away from the low-value manufacturing model that fuelled its meteoric rise over the past quarter-century.

This is part of a Chinese vision of an economy that is driven less by cheap exports, investment and heavy-duty, low-value-add manufacturing, and more by services and high-end production. 

Through “Made in China 2025”, the Chinese government has vowed to boost 10 high-technology sectors, including information technology, robotics, aerospace, railways and electric vehicles.

Beijing wants to increase research spending to 1.68 per cent of manufacturing revenues by 2025, from 0.88 per cent in 2013. This strategy will shift China’s manufacturing sector up the value-added chain and fuel the country’s export growth.

 

Moving up the value chain

China’s manufacturing sector continues to develop, and higher-value-added goods are increasingly being produced domestically, according to Oxford Economics.

The share of manufactured products in export growth will increase as China moves up the value chain. Machinery and transport equipment will account for 50 per cent of projected merchandise export growth in the decade to 2030, and will remain China’s top export sector. 

Meanwhile, on the import front, China’s robust economic expansion, and its rebalancing towards more consumer-led growth, will strengthen demand for higher-quality goods and services. Further powering China’s economic transformation is the rising affluence of its citizens. In the coming decade or so, middle-class consumers will increase from 250 million to 600 million.

As their spending and sophistication grow, they will drive up demand for imports of higher-quality goods and services. Oxford Economics forecasts that by 2030, China will be a major importer of a whole range of consumer goods, the more sophisticated of which will be supplied by developed markets like South Korea. 

This trend will help to rebalance flows between developed economies and China, turning China into an even more important source of global demand. 

China is in the midst of a transformation that will move its economy away from labour-intensive processes, and instead promote knowledge-based, higher value-add manufacturing and services; grow a middle class that generates domestic consumption; and liberalise trade across borders to boost trade flows. 

China’s influence on global trade is growing – not just through its role as a key source of regional infrastructure investments, but also as it is now a formidable market place for the world’s goods and services.

 

Helen Wong is chief executive for Greater China at HSBC.