Why The Death Of Manufacturing In China Means A Positive Economic Outlook In 2018
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of roughly 80% since 2010, it has experienced a consistent year-over-year deceleration due to an
. In the past year, the slowed growth has finally stopped. In 2017, the Chinese economy experienced
for the first time in seven years, but this acceleration is not because manufacturing is having a resurgence. In fact, many areas of manufacturing continue to fade in importance in China for a number of reasons.
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However, even as the death knell tolls for low-end manufacturing, this is ultimately a positive sign for China’s economic forecast in 2018 because it signals that China’s economy is growing up. The fact that gross domestic product (GDP) stabilized (even improved) despite manufacturing weakness means that China is able to stand on its own two feet based on services and consumption like a mature economy. The manufacturing crutch is being slowly pulled away, and China is still standing.
But before we can look ahead, it’s important to look at some of the key drivers that led to this acceleration. Traditionally, the foundation of the Chinese economy has been set in manufacturing. The government heavily subsidized the industry and
. As such, it was attractive to foreign companies to invest in Chinese manufacturing.
However, manufacturing has been weakening in China for three primary reasons. First, changes in government policy have
. Second, the
while the
, putting Chinese manufacturers at a pricing disadvantage on exports. Lastly, China is facing
. In other words, other countries in the region, such as Malaysia and Bangladesh, are offering quality manufacturing alternatives at a cheaper price. In fact, even Chinese investors are investing in
.
As manufacturers began to leave China in 2010, we saw an
that lasted until 2016. During this same time period, however, the Chinese consumer was growing stronger, and we have now reached the tipping point where the strength of consumer is outpacing the deceleration caused by the manufacturing exodus. By 2015, the
was responsible for more than 50% of China’s GDP, and in the past year,
rose 0.1% -- from 6.7% in 2016 to 6.8% in 2017 -- which, for a country of China’s size, is quite significant.
The fact that China’s economy can show accelerated growth despite the continued weakening of the manufacturing industry is a strong positive indicator that it is ready to become a mature market. While the country is still far off from becoming a saturated market, like the U.S. or Europe, and slowing its growth to a comparable rate, the transition to a consumer-based economy proves that China has entered an important inflection point. It will be pivotal for U.S. companies to understand the current transition if they want to grow their presence and offering in Asia.
Entering 2018, the strength of the Chinese consumer will continue to outpace the dwindling manufacturing industry and propel the economy forward. China has experienced consistent wage growth while the cost of living has stayed relatively low, helped along by the
. As a result,
is up. Consumers are feeling confident, and positive consumer sentiment indicates healthy future spending.
Overall, while the manufacturing outlook in China is bleak, factors such as positive consumer sentiment, a strong yuan and wage growth indicate that the consumer has grown strong enough to support a maturing economy. While the Chinese economy used to be manufacturing-based, it is now consumer-based. As the economy in China continues to mature in the coming year, we can expect an overall positive outlook.
