China’s economic upgrading

26 Oct 2016

Success is not final, failure is not fatal: it is the courage to continue that counts – Winston Churchill

Amid all the concerns about China’s structural woes, reform policy and economic rebalancing, its industrial sector has been moving up the value-added chain quietly. More crucially, the sunrise industries are mostly private-sector driven. While this is an encouraging development, only time will tell how far Beijing will let market forces and the private sector function, as there is an incentive incompatibility problem inherent in the reform process that it will have to resolve.

The first signs of industrial upgrading can be seen in the change in China’s export composition. High value-added products (including machinery, transport and electrical equipment, musical instruments, watches and accessories, optical and medical equipment, high-tech products etc.) account for half of total exports now, with the high-tech portion of these products (including biotechnology, life science, electronics, computers, telecommunication, aerospace, technology etc.) accounting for 30% of the total.

The high-tech industries have registered significant growth despite the sharp economic slowdown in recent years. Notably, output of industrial robots grew by a staggering 436% YoY in July 2016 from November 2015 when the data series was first available. Overall, high-tech industries, including industrial robots, wind power, new energy vehicles, solar cell, nuclear power and smartphones, have grown by between 15% and 60% YoY since late 2015 when overall output momentum (as approximated by the official manufacturing purchasing managers’ index or PMI) contracted.

The emergence of China’s high-tech sector is not an illusion, as can be seen by the steady rise in their export share (see Chart 1). This sector’s strong and persistent growth momentum is also seen in the EPMI (or PMI for seven emerging industries with strategic importance, including energy saving & environment protection, IT, biology, high-end equipment, new energy, new materials, new-energy cars) sub-component of the Caixin manufacturing PMI1 (Chart 3). Despite its high volatility, the EPMI averaged 54.7 between 2014 and July 2016 (the latest data available), compared to 49.2 for the overall Caixin manufacturing PMI and 50.2 of the official manufacturing PMI.

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