Why Investors Shouldn’t Fret Over China’s Diminishing Manufacturing Dominance

China’s waning role as the world’s factory means it’s time for emerging market investors to find opportunities elsewhere, according to Eastspring.


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Many global companies have been shifting their supply chains away from China due to the strict pandemic control policies that have disrupted manufacturing in the country. For emerging market investors, that’s good news.

According to Andrew Cormie, who leads the global emerging markets team at Eastspring Investments, China’s manufacturing sector is so big that even a slight shift in manufacturing activity away from the country would greatly benefit other emerging market economies. In 2021, China produced $4.87 trillion in manufacturing value added (MVA), which measures the total net output of all resident manufacturing activity. That was significantly higher than the MVA produced by other emerging countries, such as India ($447 billion) and all Latin American countries combined ($557 billion).

“If China moves one-tenth of its manufacturing value added to India, it doubles the size of the Indian manufacturing sector,” Cormie told Institutional Investor in an interview. “What is a relatively small number for the Chinese economy is a massive number for the Indonesian, Vietnamese, Cambodian, Philippine, and Indian economies.”

According to Eastspring, India’s merchandise export is expected to rise from $395 billion in 2021 to $1.2 trillion in 2031. In addition, its share in world merchandise exports is projected to climb from 12.7 percent to 16.2 percent during the same period.

Another example is the group of countries that have benefited from the shift in electric vehicle manufacturing away from China. Global copper producer KGHM, for example, has ramped up mining activities in Eastern European and Latin American countries, including Chile, which possess the necessary raw materials and manufacturing capacities to meet the rising demand for electric vehicles in the United States and Europe.

Even for emerging market investors who are still betting on Chinese companies — which make up more than 30 percent of most emerging market equity indices — the supply chain shift isn’t all bad news. According to Cormie, the declining manufacturing activity in China signals that the economy is maturing, much like what Japan went through after World War II. In the post-war period, Japan capitalized on its low cost of labor and successfully developed its electronics industry.

“The Chinese economy is going through exactly the same thing,” Cormie said. He added that China has broadened its economy over the past two decades and has transitioned into a domestic consumption-driven model, fostering more sustainable growth and reducing its reliance on exports and manufacturing.

But Cormie said that investors shouldn’t expect China’s dominance in the global manufacturing sector to disappear overnight. “China took three decades to get to the point where it dominated the supply chain,” he said. “Now people have gotten uncomfortable and are trying to diversify, but it’s not going to happen in 12 or 18 months. It’s probably going to take a decade to happen.”