The recent volatility in the Chinese stock market has not changed the fundamental picture: China is poised to strengthen its trade leadership with Asian countries as it sets out to re-shape those commercial links while embarking on new development initiatives to bolster and transform economic growth at home.
The country’s continuing 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 are forecasting a solid pace of growth in the coming decades. They suggest 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.
Firstly, One Belt, One Road 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 China’s traditional land-based Silk Road connecting central China through Central Asia to Europe. The Road refers to the Maritime Silk Road that encompasses 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 modernize the Chinese economy.
It is estimated that $11 trillion US will be needed for urban infrastructure financing in Asia by the end of 2030. Where some countries lack sufficient infrastructure to support economic growth, China has the expertise, funds and capacity to help finance necessary projects.
Beijing has vowed to allocate an initial investment of $40 billion US 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 (AIIB), which has garnered support from 57 countries as founding members. Initially, the AIIB will have authorized capital of $50 billion US, which will be raised eventually to $100 billion US.
Secondly, 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 ten high-technology sectors, including information technology, robotics, aerospace, railways, and electric vehicles. Beijing is aiming 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.
China’s manufacturing sector continues to develop, and higher value-added goods are increasingly being produced domestically, according to the Oxford Economics forecast.
The share of manufactured products in export growth is expected to increase as China moves up the value chain. Machinery and transport equipment will account for around 50 per cent of projected total 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. Transport equipment, for example, will gain importance and information and communications-technology equipment will remain a key driver of import demand. However, industrial machinery will remain by far the single largest import category. It will contribute 29 per cent of overall goods imports growth in the period from now to 2030.
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 forecast that, by 2030, China will be a major importer of a whole range of consumer goods, the more sophisticated of which are likely to be supplied by developed markets or newly-industrialized economies like South Korea.
This trend will help to rebalance existing flows between developed economies and China, turning China into an even more important source of global demand. Its increasingly educated labour base, meanwhile, will become a force in global innovation.
China is in the midst of a transformation that will move its economy away from the labour-intensive processes of the past, and instead promote knowledge-based, higher value-add manufacturing and services; grow a robust middle class that generates domestic consumption; and liberalize trade across borders to further boost trade flows.
China’s influence on global trade is continuing to grow — not just through the role it plays as a key source of regional infrastructure investments, but also as it is rapidly becoming a formidable marketplace for an ever-wider range of the world’s goods and services.
Author: Helen Wong is Chief Executive, Greater China, The Hong Kong and Shanghai Banking Corporation Limited.