While the US is ratcheting up sanctions and other forms of curbs on China, the latter, tapping its increasingly large and sophisticated manufacturing base, has been busy stepping up investments and trade ties with other economies.
By doing so, the US is playing a diminishing role in the international trading system it created, whereas China’s role is increasing. “That might sound counterintuitive, given everything that you've heard about export controls and the slowing Chinese economy,” observes John Lee, director of consultancy East West Futures.
In the US, strong domestic political forces — and not businesses — determine how the world’s largest economy engages with the global trading system. There are always lawmakers to pacify and lobbies and other constituents to engage. Japan’s Nippon Steel’s US$14 billion bid for US Steel has raised the expected ire and the buyer is sending its top management to Washington to “sell” the deal to lawmakers and other interested parties.
To sweeten the deal, Nippon Steel has laid down a commitment to keep the US Steel name and to keep jobs at the target’s Pittsburgh corporate headquarters. Other similar examples abound.
On the other hand, China has drawn itself closer to other smaller economies, including Asean countries, expanding both trade and investments. More significantly, China is no longer seen as the cheap manufacturer of simple white goods or textiles. It is increasingly a producer of higher value-added parts and sophisticated products. “We are seeing a structural change in the role that China plays in the global economy,” says Lee, speaking on Jan 23 at a seminar organised by the Iseas-Yusok Ishak Institute, where he is a visiting fellow of the institute’s regional strategic and political studies programme.
China’s manufacturing strength, built up over the decades following its opening, has been elevated to the next level. China’s manufacturers, especially if they are in favoured sectors such as clean energy, continue to enjoy favourable credit from banks so that they can generate higher value and sustainable growth over the longer term. In contrast, the previously red-hot property sector is buckling under deliberate cooling measures imposed by the government.
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In the context of a global manufacturing and trading ecosystem, China is seen to be on its way to attaining “commanding heights”. Or, as another analyst had put it recently, China is seeking to become the “Amazon of manufacturing”, where everything will be either made in China, or, Chinese firms will play a large role in the supply chains, says Lee.
Growing EV clout
To be sure, China’s economy is no longer seeing the double-digit growth it used to enjoy for years. The country is facing a multitude of somewhat interlinked pressures, ranging from export curbs, tariffs, and costly moves to decouple or de-risk. As such, Lee agrees that there is some scepticism that China can continue to move forth to become a key, technologically advanced player.
Companies such as Huawei, a prime subject of US sanctions, have described itself as getting “choked at the throat” when suppliers such as ASML of the Netherlands and chip maker Nvidia are not allowed to sell certain chip-making machines and higher-end chips respectively to China, and when Chinese companies cannot have their chips made by leading foreign vendors like TSMC.
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Lee believes it is a matter of time before China overcome these speed bumps. “Generally speaking, across most sectors, I would argue that China already has all of the conditions in place to enable this vision. It has the R&D system, the skilled labour pool, the ecosystem of firms and the institutional capacity.”
Furthermore, at the rate China’s own economy is developing, it may be able to absorb all or most of the output of higher-value products. This is in contrast to the likes of other manufacturing powerhouses Japan, South Korea or even Germany which relied more heavily on exports when they were going through their similar phases of growth, adds Lee.
He also points out that what is also working in China’s favour is that many of its trading partners, including Asean countries, are not showing any signs that they are interested in shutting out Chinese products and investments, unlike the US and to a lesser extent, Europe.
In this regard, China, having become the world’s largest EV maker, is leading the way in forming tighter trade and business ties with other markets. China-based EV brands are actively going after this fast-growing market, gaining an edge over traditional car-makers from Detroit to Wolfsburg. A report by the New York Times last September sums up this trend with a headline that reads "China is flooding the world with cars".
This market leadership position, says Lee, cannot be just attributed to subsidies given by the Chinese government for EV buyers. Rather, what is achieved today is due to systematic efforts over the years to grow its own expertise, industrial capacity and markets in batteries, control components and other critical parts used in building EVs.
Just on Jan 23, data from China Automotive Technology and Research Center showed that Shenzhen-based BYD, which bet its whole house on EVs, has overtaken Volkswagen to be China’s best-selling car brand last year.
BYD had earlier overtaken Tesla, the better-known US EV maker, in terms of sales in the fourth quarter last year, making it the largest seller of EVs worldwide. Somewhat similarly, Contemporary Amperex Technology Co, based in Ningde of Fujian province, is a leading supplier of EV batteries, with a global market share of 37% in 2022. “This concentration of scale and capacity in China is going to make it extremely difficult for other countries to compete,” says Lee.
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Meanwhile, China’s growing clout as an EV maker has increasingly felt in Asean, which has been a traditional base of numerous component suppliers to its car-making industry. Lee notes that China has become more self-reliant and is increasingly able to meet quality standards to compete on the international stage.
Even so, the likes of Thailand, Indonesia, Malaysia and to a lesser extent Vietnam are all jumping on the automotive bandwagon, as they try to grab their share of the EV supply chain pie. By doing so, they are upgrading their own industries as well. “So, to be very clear about this, this is not just that their consumers are buying Chinese EVs. This is about the integration of their industries at a very basic level with the Chinese economy,” says Lee.
Beyond the BRI
Over the past decade, much talk and action has been on the so-called Belt Road Initiative, where China helped fund the construction of highways, railways and ports in emerging countries across Asia and Africa. Amid some reports of defaults, most famously Sri Lanka, interest level in BRI has eased off just as the pandemic hit and has yet to be reignited.
Never mind the new container ports or a highspeed rail line built by Chinese contractors - judging by the way things are moving, Lee is seeing tighter integration of supply chains linking up China and Asean shaping up. Take German semiconductor firm Infineon as an example. Its regional headquarters is in Singapore but the additional capacity it is putting in this region is in Malaysia, as it gears up to meet growing demand from its EV customers in China, contributing to what is effectively a China-Asean manufacturing nexus.
Similar trends are playing out in other industries. “You are seeing more activity being done in Asean economies rather than China itself, but this is not independent of China – it is linked to it,” says Lee.
