China’s belt and road may accelerate exit of manufacturing to Vietnam and India, researchers warn

The trade war with the United States coupled with the “Belt and Road Initiative” has the potential to add further pressure to China’s sluggish economy and debt pile, according to researchers, as the benefits of manufacturing in the mainland decrease.

China’s manufacturing industry has already been hit by the US trade tariffs, in particular, the smaller exporters who are the most vulnerable to slowing demand and slimmer margins in the face of competition from low-cost alternatives including Vietnam and India.

Many of China’s competitors in Southeast Asia have already joined the belt and road plan to grow global trade, meaning the manufacturing situation in the mainland is likely to get worse, the researchers said, as investment in the initiative may speed up the exit of low to mid-end production from China to the likes of Vietnam and India despite the benefits of better infrastructure and supply chain.

“The advantages [of producing in China] still exist, but in terms of dynamics, the relative advantages are decreasing as a result of risks and uncertainties coming China-US trade conflict. Of course, the reform process of those countries [Vietnam, India] is also an important factor,” said Xu Qiyuan, an economist at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

Foreign direct investment in Vietnam’s manufacturing sector, driven by electronics manufacturing, has risen to 11 per cent a year over the past five years, and it has been a key driver of Vietnam’s export growth, according to data from Oxford Economics.