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The Trend of Industrial Transformation in Mainland China and Role for Hong Kong

Since the China-US trade disputes began in 2018, the bilateral commercial relations between the two nations remained tense. In May 2019, the US further escalated the trade measures, in which around US$250 billion of Chinese products are subject to additional tariff at 25% (presenting nearly half of the US imports from China). The 25% tariff would substantially increase the trading costs for corporates in both nations. In general, exporters maintain around 5-10% of profit margin. In this connection, even the US importers are willing to share half of the newly imposed tariff, the Chinese producers could still face losses when exporting to the US market. With the China-US trade disputes getting longer and more complicated, corporates are likely to respond by adjusting their global production network and supply chain, in order to minimize the impacts from trade uncertainties. Indeed, Chinese corporates have long been relocating their factories to other low-cost economies based on their own development needs. The China-US trade disputes would only accelerate this process. As the top investment platform and international business hub for Mainland corporates, Hong Kong can play an important role in assisting these corporates to explore overseas markets and upgrade amid the trend of industrial transformation in Mainland China.

1. Structural shift in China's manufacturing investment

In recent years, both labor costs and land prices rose swiftly in China along the rapid economic growth, causing some companies to reduce investment in several low-profit manufacturing sectors, and shift their production capacity to other areas with lower overall costs. It indeed indicated that Chinese manufacturing sector has been in transition from high-speed growth to high-quality development. According to the statistics of fixed assets investment, growth in manufacturing investment started to slow down below 10% in 2015, a sharp slowing down compared to the 20% growth in 2011 and 2012. The downward trend continued until 2016 with growth stabilizing at around 4% from 2016 to 2017. Though a rebound to 9.5% was seen in 2018, it fell back to 3% in 2019. In the meantime, China's industrial value added broadly maintained a real growth at 5-6% per year with export values staying at a relatively high level. These figures suggested that the upgrade of China’s overall industrial productivity had helped offset part of the impacts from slowing manufacturing investment.

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Content provided by Bank of China (Hong Kong)
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