The Rise and Coming Fall of Chinese Manufacturing
A Comparative Analysis with Japan’s Manufacturing Sector
Chinese overcapacity is raising concerns worldwide. It is easy to see why: China accounts for nearly one-third of the world’s manufacturing value-added, and one-fifth of global manufacturing exports. But there is good reason to believe that the decline of China’s manufacturing sector is imminent.
Lessons from Japan’s Decline
To understand what is happening now in China, it is worth recalling Japan’s recent history. After World War II, Japan’s manufacturing sector grew rapidly, thanks largely to access to the massive US market.
However, the 1985 Plaza Accord, which boosted the yen’s value and weakened Japanese exports, together with an ageing population and a shrinking labour force, reversed this trend.
From 1985 to 2022, the share of Japanese goods in US imports dropped from 22% to 5%, and Japan’s share of global manufacturing exports declined from 16% to 4%.
A Similar Trajectory for China
China has followed a similar upward trajectory in recent decades, but its manufacturing rise was even more dependent on the US market. Japan’s imports from the US equalled 51% of its exports to the US in 1978-84, compared to a 23% share for China in 2001-18.
The One-Child Policy’s Impact
Chinese family-planning policies are largely to blame for this imbalance. Typically, household disposable income would account for 60-70% of a country’s gross domestic product, in order to sustain household consumption of around 60% of GDP.
In China, however, the one-child policy – which was in place from 1980 until 2015 – limited household earnings, encouraged high savings, and constrained domestic demand.
Excess Capacity and a Shrinking Workforce
One can look at it this way: if wages normally amount to US$60-70, Chinese workers would receive only US$44 and would have just US$37 of spending power, whereas Japanese workers would have US$56 of spending power.
China’s government, however, has plenty of financial resources, which it uses to support industrial subsidies and investment in manufacturing. Moreover, because China’s manufacturing sector offers high returns, international investors are willing to channel capital towards it. Add to that a surplus of about 100 million workers, and excess capacity is difficult to avoid.
A US-Driven Shift
Given insufficient demand at home, China’s only option for reducing its excess capacity and creating enough jobs for its population is to maintain a large current-account surplus. That is where the US comes in: the share of Chinese goods in US imports rose from 1% in 1985 to 22% in 2017. In 2001-18, the US accounted for three-quarters of China’s trade surplus.
A New Era for Chinese Manufacturing
As the US backlash against China has intensified, China is losing some of its own manufacturing companies, which are shifting part of their production to countries such as Vietnam and Mexico, to avoid US tariffs. This partial transfer augurs a wider withdrawal, much like that faced by Japan’s manufacturing sector as it fell into decline.
Conclusion
China is looking increasingly like Japan for two other reasons. First, its workforce is rapidly shrinking and ageing. Within a few years, China will probably record just six million births per year. Meanwhile, the median age of migrant workers, who make up 80% of China’s manufacturing workforce, has risen from 34 in 2008 to 43 last year, with the share of people over 50 rising from 11% to 31%. Some manufacturing plants are already closing for lack of workers.
Second, China’s services sector is set to squeeze manufacturing. As China’s government seeks to increase the GDP share of household disposable income, Chinese demand for US goods will rise, and some manufacturing workers will shift to services, which is also where China’s rapidly growing pool of college graduates will find employment.
Frequently Asked Questions
Q: Why is China’s manufacturing sector facing a decline?
A: China’s manufacturing sector is facing a decline due to a combination of factors, including an ageing population, a shrinking workforce, and a surplus of workers.
Q: Is this a new phenomenon?
A: No, this is not a new phenomenon. Japan faced a similar decline in its manufacturing sector in the 1980s and 1990s due to an ageing population and a shrinking workforce.
Q: Will China’s services sector offset the decline in manufacturing?
A: Yes, China’s services sector is expected to grow and offset the decline in manufacturing. However, this growth is likely to come at the expense of manufacturing jobs.