China is the world’s largest manufacturer in terms of output and has gained a reputation as the “world’s factory” soon after its accession to the World Trade Organization (WTO) in 2001. Lured by cheap labour, China’s commitment to opening up its economy, and low tariff access to Western markets, all due to its WTO entry, foreign firms and investors rushed to do business in the world’s most populous country in the new millennium. Aided by state investment, China has since become a world leader in the manufacture of steel, car parts, chemicals, electronics, and robotics. How is the performance in China’s manufacturing sector measured? China’s two purchasing managers’ indices (PMIs) are indicators of the economic health of the economy, gauging business sentiment in the sector. The official PMI released by the National Bureau of Statistics largely measures the sentiment among larger firms, many of which are state-owned. The PMI produced by Markit for Caixin magazine largely measures sentiment among smaller, mostly private firms. The indices are compiled from surveys of business owners and supply-chain managers, gauging changes in production, new orders, employment and delivery times, among other metrics. Both are usually released at the start of each month, meaning they serve as early indicators of the economic conditions ahead of other data. In June 2021, China’s official manufacturing PMI stood at 50.9, with a reading above 50 signifying activity growth in the sector. This followed a reading of 51.0 in May. The Caixin /Markit manufacturing PMI rose to 52 in May from 51.9 in April. How has China’s manufacturing sector evolved? Relocating production out of China began before the US trade war or the coronavirus pandemic. Companies, especially those in low-margin, labour-intensive industries, began relocating to Southeast Asian countries such as Vietnam because of the rising cost of wages, land and taxes in China. Large parts of the clothing and footwear industry, in particular, have left China for cheaper locations such as Bangladesh. Many of China’s laid-off migrant workers in labour-intensive industries have also shifted to the country’s burgeoning services sector. This trend accelerated due to the impact of the coronavirus pandemic. China economy: latest data about world’s second largest economy China’s export growth was initially fuelled by the so-called processing trade, with Chinese factories assembling components made in other countries. However, China is increasingly producing its own components and high-value goods, with processing-trade industries – smartphone assembly, for instance – starting to move to cheaper locations such as Vietnam and India. How did the coronavirus affect China’s manufacturing sector? Factories in China traditionally close during the week-long Lunar New Year holiday in late January or early February, but the shutdown was extended in 2020 as part of efforts to contain the coronavirus outbreak. Manufacturers then struggled to resume operations, with many workers unable to return to work due to virus-related travel restrictions. China’s official manufacturing PMI dropped to 35.7 in February from 50.0 in January, below the 38.8 figure reported in November 2008 at the start of the global financial crisis, and indicating a sharp contraction in sector activity. The Caixin /Markit manufacturing PMI plunged to 40.3 in February from 51.1 in January. The survey was well below market expectations for a drop to 46.0, and it marked the lowest reading since the survey began in April 2004. It was weaker than the 40.9 figure in November 2008. China’s manufacturing engine, though, bounced back strongly in March, with the official manufacturing PMI recovering to 52.0. By November, the Caixin /Markit manufacturing PMI rose to 54.9 from 53.6 in October, the sharpest improvement in conditions since November 2010, and a seventh consecutive monthly improvement in the health of the sector. The official manufacturing PMI also rose to 52.1 in November from 51.4 in October, the highest since 52.4 in September 2017. Global supply chains were also disrupted by the coronavirus outbreak, with some expressing concerns about an overreliance on Chinese production , especially for crucial goods such as medical supplies and medications. Tens of thousands of opportunist Chinese manufacturers also entered the mask-making industry to capitalise on the boom in demand during the coronavirus pandemic. In the first five months of the year, 70,802 new companies registered to make or trade face masks in China – a 1,256 per cent rise from a year earlier. At the same time, 7,296 new companies registered to make or trade meltblown fabric, a vital component in mask making, resulting in a 2,277 per cent increase in registrations from a year earlier, according to Tianyancha, a company registration information website. But the gravy train ground to a halt for some producers of meltblown and nonwoven fabric, who were forced to shut their factories in the face of stiff competition. How did the US-China trade war impact China’s manufacturing industry? Ongoing US-China trade tensions are likely to reshape manufacturing in a way that could lead to the further relocation of production in the future, according to analysts. US President Donald Trump has pushed for decoupling between the US and Chinese economies, vowing to reward companies that move their operations out of China and back to the US. “We will make America into the manufacturing superpower of the world and will end our reliance on China once and for all,” Trump said in September. But in the American Chamber of Commerce Shanghai’s annual member survey in September, 92.1 per cent of members said they did not have plans to leave China. Only 5.1 per cent of companies with global revenues greater than US$500 million planned to flee the country, even with the Trump administration pushing to decouple the world’s two largest economies. What was the ‘Made in China 2025’ plan? Over the last decade, the Chinese government launched several industrial policy plans, including the controversial “Made in China 2025” blueprint, aimed at developing world-leading hi-tech firms in 10 cutting-edge industries as part of its plan to move value chains away from a traditional reliance on the mass production of low-end goods. Made in China 2025 was the name of this Chinese government plan to upgrade its hi-tech industries to Western levels and lessen its dependency on imports. The controversial plan was shelved under pressure from the United States and European Union, who complained that the large subsidies China was using to develop the industries were examples of its unfair trade practises. How is China trying to upgrade its manufacturing industry? A study by Renmin University of China in Beijing in July 2019 said it would take more than 35 years to reach the government’s goal of having new industries account for 30 per cent of gross domestic product. Excessive use of industrial subsidies, particularly by local governments, as well as the poor implementation of anti-pollution standards, and the inability of the government to help small, private firms deal with short-term operational difficulties, were stunting the innovation process necessary to upgrade the nation’s manufacturing base, the study found. In November 2019, China’s Ministry of Industry and Information Technology unveiled guidelines on promoting the upgrading of the country’s vast manufacturing system. About 20 “shared manufacturing platforms with strong innovation capabilities and great industry influence” were to be built up by 2022, and then turned into “key drivers for high-quality growth” by 2025, according to the plan. While the ministry did not specify the platforms nor name any potential candidates, it clarified that the plan involved sharing production facilities, tools and equipment, as well as intellectual resources such as product design and development capabilities. Manufacturing-related services such as storage space and logistics could also be shared, the guidelines said. It is hoped that the plan will boost resource allocation, improve efficiency and cut idle capacity among large, medium-sized and small businesses. What does China’s dual-circulation strategy mean for its manufacturing industry? The so-called dual-circulation strategy involves relying more on domestic consumption in its huge domestic market of 1.4 billion consumers, and on home-grown innovation, to support future growth in response to an increasingly unstable and hostile outside world. It means China’s production system will be repositioned to focus more on demand at home – internal circulation – rather than abroad. What is China’s dual circulation economic strategy and why is it important? Nevertheless, the strategy still calls for the production of high-value exports, or external circulation. Beijing will also push for technological self-reliance, having already provided incentives to build up the domestic development and production of semiconductors and other cutting-edge technologies, particularly in areas that are, and could be, the target of sanctions by Washington. What is the outlook for China’s manufacturing sector? China is expected to be the only Group of 20 country to record positive growth in 2020, with the International Monetary Fund projecting GDP to increase 1.9 per cent in 2020 and 8.2 per cent next year. “Looking ahead, the recovery of household spending has been the most significant development recently,” said Julian Evans-Pritchard, senior China economist at Capital Economics, commenting on the official PMI data for November. “We expect it to continue as the tightening of the labour market and improving consumer sentiment lead households to run down the excess savings they accumulated this year. “That should further support the rebound in services activity. It should also boost manufacturing, which will continue to benefit too from supportive fiscal policy and strong foreign demand.” Want to know more? Each week, political economy journalist Finbarr Bermingham wraps up the latest developments in tariffs, diplomacy and economics from reporters and editors at the Post in the US-China trade war podcast. And in every episode of the Inside China podcast, we take a deep dive into a specific topic, mixing independent reporting and exclusive interviews to bring you unique insights into an emerging potential superpower. Now, we are featuring regular updates on the coronavirus pandemic from across the country.