Industrial China is alive and well despite concerns of an economic slowdown. It just does not look like it did before — or at least, what everyone is used to.
Data this past week showed a dismal picture: Industrial output rose 3.8% from a year earlier, which was below expectations, fixed investment grew slower than forecast and credit, usually a sign the economy is pushing through, was weak. Property sector figures, long taken as an indication that authorities were going to keep developers’ debt-fuelled building extravaganza on course, were depressing all around. Goldman Sachs Group cut its gross domestic product forecast for China’s economy, lowering its projection for this year to 3% from 3.3% earlier.
Other numbers, though, paint a different picture: Beijing’s priority areas are doing just fine. China’s electric vehicle battery installations increased by 114% while EV production and sales both grew by over 100% in July. Overall suppliers’ delivery times are currently well above the average level since January 2020, but have risen sharply over the past few months for emerging industries that include high-end equipment manufacturing, EVs and other sectors. In addition, despite what the sentiment surveys tell you, foreign direct investment into China’s high-tech manufacturing increased 31.1% in the first six months of the year. South Korean investment climbed 37.2%, while the US was up 26.1%.
Assuming the entire economy is on its way down is missing the point. The truth is, Beijing’s industrial priorities for the development of high tech sectors have not changed much from those laid out in recent five-year action plans. This week, the ministries of science and technology and finance laid out a plan for 2022 and 2023 for measures including financial support and tax incentives to boost companies’ technical capacities and ability to innovate — onshore and offshore.
Investors and China watchers did not want to believe that the factory floor of the world could selectively upgrade itself and gain the market share it has. Do not get me wrong — this is not a bullish assessment of China’s sudden technological heft. It is more about taking a deeper look at the changing anatomy of the country’s industrial economy. Expectations based on what China Inc used to be will, therefore, fall short.
It is already moving up the value ladder. EV battery technology and the entire supply chain around it, including metal processing, have found a home in China. Firms in priority sectors continue to boost their capital expenditure.
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Longi Green Energy Technology Co, a solar panel materials maker with a market capitalization of almost US$70 billion ($96.8 billion), announced last week that it was spending an additional RMB6.95 billion ($1.66 billion) on top of the RMB19.5 billion already announced to increase capacity for a solar cell and module production project in Ordos, Inner Mongolia.
Warren Buffett’s Berkshire Hathaway-backed BYD Co signed an agreement to invest RMB28.5 billion in a battery production plan. Chipmaker Semiconductor Manufacturing International Corp said it wasn’t planning on cutting its US$5 billion spending plans, its highest outlay compared to the amount spent annually over the last five years. Expenditure in the renewable power sector — accounting for just over 80% of new capacity in the first half of this year — increased 22.4% in the second quarter.
The world’s top industrial technology firms recognize how much they need China, too. The likes of the high-tech Dutch chip equipment maker ASML Holding have acknowledged this. In its latest earnings call in July, CEO Peter Wennink said, “We need to realize that China is an important player in the semiconductor industry” with the manufacturing capacity for certain types of chipmaking that “the world needs.” Still, ASML has been caught up in geopolitics, with the US pushing the Netherlands to ban the firm from selling to China.
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There is no doubt bad news but if you look past headlines on rolling lockdowns, troubled firms in non-priority sectors and power rationing, it is clear Beijing’s intent to push through remains solid. So while some firms in Sichuan will have to balance electricity usage and production volumes, others there have said their operations are not affected. In fact, one optimistic view is that as China builds out its upgraded factory floor, the country could eventually relieve unemployment pressures, especially for the growing mass of university graduates without jobs.
The market’s memory is short, but it is important to recall China’s problems — the crumbling property sector, creaking small banks and frothy short-term money markets — have been a long time in the making. All this should hardly be a surprise then. Time to look through a new lens. — Bloomberg Opinion
