Industrial China is alive and well despite concerns of an economic slowdown. It just doesn’t 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 percent 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 Inc. cut its gross domestic product forecast for China’s economy, lowering its projection for this year to 3 percent from 3.3 percent earlier.
Other numbers, though, paint a different picture: Beijing’s priority areas are doing just fine. China electric vehicle battery installations increased by 114 percent while EV production and sales both grew by over 100 percent in July. Overall suppliers’ delivery times are currently well above the average level since January 2020, but for emerging industries that include high-end equipment manufacturing, EVs and other sectors have risen sharply over the past few months. In addition, despite what the sentiment surveys tell you, foreign direct investment into China’s high-tech manufacturing increased 31.1 percent in the first six months of 2022. South Korean investment climbed 37.2 percent, while the US was up 26.1 percent.
Assuming the entire economy is on its way down is missing the point. The truth is, Beijing’s industrial priorities on the development of high-tech sectors haven’t 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 didn’t want to believe that the factory floor of the world could selectively upgrade itself and gain the market share as it has. Don’t get me wrong — this isn’t a bullish assessment on China’s sudden technological heft. It’s 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.
Longi Green Energy Technology Co., a solar panel materials maker with a market capitalisation of almost $70 billion, announced last week that it was spending an additional 6.95 billion yuan ($1.02 billion) on top of the 19.5 billion yuan 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 28.5 billion yuan in a battery production plan. Chipmaker Semiconductor Manufacturing International Corp. said it wasn’t planning on cutting its $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 percent of new capacity in the first half of this year — increased 22.4 percent in the second quarter.
The world’s top industrial technology firms recognise how much they need China, too. The likes of the high-tech Dutch chip equipment maker ASML Holding NV have acknowledged this. In its latest earnings call in July, the firm’s Chief Executive Officer Peter Wennink said, “We need to realize that China is an important player in the semiconductor industry” with the manufacturing capacity on 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.
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’s 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 aren’t 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’s 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.