China CFO survey showed increased intention to move production out of China from 2018
CFO surveys show high intention of moving production out of China
The US-China trade war and Covid-19 have intensified pressures for supply chain decoupling from China. UBS Evidence Lab CFO surveys suggest high and increased intention of moving away from China by export-oriented companies. 60% in the China CFO, 85% in the North Asia survey and 76% in the US CFO survey said they had moved or plan to move a part of their production (average 30%) out of China. Yet we have not observed significant outflows of foreign investment while China's exports have outpaced global trade year to date. How should we look at survey findings in the macro context? How should we think about the impact of supply chain shifts and decoupling on China?
Supply chain shifts and slowdown of globalization are not new
Global trade has slowed since the global financial crisis (GFC) while FDI flows weakened in the past few years. The adjustment of global supply chain has been ongoing as well, with some labor intensive sectors moving away from China looking for cheaper places to produce. This adjustment coincided with China's own change in economic structure, with trade, export and manufacturing importance declining while that of domestic demand and services rose. China's export and industrial sector also moved up the value chain.
Supply chain shifts may depress China's manufacturing investment
Trade war and related uncertainties have increased the cost and risk of producing in China, while Covid-19 may trigger more political pressures to shorten the global supply chain. We estimate that in the coming year, actual supply chain shifts or delay in capex in China may directly reduce manufacturing investment by 2ppts, which is incorporated in our 2020 forecast of a 5% decline in manufacturing investment. The overall impact through related sectors may be larger, though some supply chain shifts may result in moving to China for its large and rapidly growing market. The impact on employment may be limited and can be offset somewhat by industries catering to domestic demand.
Reform and opening can reduce negative impact of decoupling
Over the longer term, decoupling in the technology space is most worrying – though eventually China will likely catch up and build its own eco system, the lack of access to advanced technology and information exchange will likely mean slower productivity gains and lower potential growth in the interim period, the coming years. China's continued opening and reform can help keep the economy competitive and attract more investment to take advantage of its large and fast growing market.