China’s Economic Turmoil: In addition to a real estate crisis and deflation, China faces weak consumer confidence and crashing stocks. But none of that means another country can easily replace China as the world’s top manufacturing powerhouse.
As US-China trade relations deteriorate amid tariffs and geopolitical tensions, Eurizon strategists Stephen Jen and Joana Freire said there is little evidence of de-globalization.
Vietnam and Mexico, which surpassed China as the US’s top trade partner in 2023, have also spearheaded a reordering of global trade flows.
Eurizon said the countries that have exported more to the US in China’s place are now importing more than ever from China to replace China.
China has not ‘lost’ in this trade spat, Jen and Freire said.
Trade focus shifts in China
The share of Chinese exports in the US market has declined from 22% to 14% since 2017, and the Trump administration’s policies have indeed discouraged direct Chinese imports.
According to Eurizon, China remains the world’s biggest exporter, with a 15% market share.
This marks an all-time high, excluding distorted pandemic levels.
By investing heavily in Mexico and Vietnam, which the US prefers to import from, Beijing has achieved the “surprisingly successful” outcome, Jen and Freire said.
By exporting components to these countries for final assembly, China is able to avoid US tariffs on Chinese-assembled goods.
“China has invested and exported more in recent years to exactly the friend-shoring destinations to which the US has shifted its import sourcing,” Eurizon strategists reported.
Exports to Europe have also increased, compensating for the loss of direct US goods to China.
China is the ‘next China’
Strategists at Eurezon remain doubtful that another country can replace China as the world’s leading manufacturer.
China’s capacity far outpaces its rivals, and export prices in Mexico and Vietnam have risen by 30% and 31%, respectively, in the last three years.
In a period of a strengthening dollar, the fact that export prices have risen more rapidly than general inflation indicates stresses and pressures on manufacturing capacity in these countries,
Eurizon strategists cited shortages of workers, infrastructure, and transportation.
There are 212 million manufacturing workers in China, more than in the US, the EU, Japan, Canada, Korea, India, Mexico, and Vietnam combined.
China may slowly reorient away from the world, but smaller countries wouldn’t be able to handle rapid changes that force them to become manufacturing hubs.
According to Jen and Freire, “the ‘next China’ could actually be China: no other country has the manufacturing capacity to compete with China.”
Domestic Headwinds amid China’s Economic Turmoil
While China may not lose its trade status, its economy continues to deteriorate.
“China’s post-pandemic recovery has been anemic due to weak sentiment, and the country is digesting a prolonged period of property overinvestment,” UBS strategists wrote in a note Monday.
According to Eurizon, Beijing’s policy mistakes of the last several years may have fueled the loss of foreign direct investment. Its faltering property market has lowered household wealth, hurt consumer confidence, and crimped demand and spending.
According to the latest CPI report, the country’s deflation problem is getting worse.
Meanwhile, Chinese stocks have underperformed global equities, reflecting the world’s bearish view of the country.
Investor sentiment toward China remains depressed today, according to UBS strategists. Foreign fund allocations to Chinese assets have been declining, which has pushed valuations of Chinese stocks very low.
To eventually become the world’s largest economy, Beijing can still use supportive, pragmatic policy to entice foreign investors back into the country.
China’s position as the world’s preeminent manufacturing base has changed as much as the world’s attitude toward it,” they said. “By and large, China has so far managed to maintain its dominating position.”
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