Is lower Chinese Manufacturing all part of the Plan?

China released a survey of purchasing managers yesterday and Chinese manufacturing is at an 11 month low. From Bloomberg:

“China’s manufacturing weakened by more than estimated in July, according to a preliminary survey of purchasing managers that casts further doubt on the government’s ability to meet its annual economic growth (CNGDPYOY) target.

The reading of 47.7 for an index released today by HSBC Holdings Plc and Markit Economics, if confirmed in the final report Aug. 1, would be the lowest in 11 months. Readings below 50 indicate contraction. A separate euro-area gauge showed manufacturing unexpectedly expanded this month.”

Could weaker manufacturing be a welcome sign for China? Could it be part of the plan?

A few years back I had read the most recent 5 year plan for China for 2011-2015 in detail. The plan is amazing simply as a document. I’d call it a must read if you are interested in China at all. However, if you want a shorter version, here is the summary from wikipedia.

One of the major ideas in the plan is a shift to greater domestic consumption and away from investment. This is a continuation of the economic restructuring goals of the prior 5 year plan.

Here is the first words of Chapter 9 of the guideline, which deals with manufacturing:

“Chapter 9: Improve and promote manufacture

Optimize structure, improve varieties and quality, enhance industry supporting capability, eliminate backward production capacity, develop the advanced equipment manufacturing industry, adjust the optimize raw material industries, transform and improve the consumer goods industry, and promoting the enlargement and enhancement of manufacturing industries.”

The very first words are about improving quality and structure. This means competing on quality more than on price.

We’ve seen how China allowed the Yuan to hit levels where U.S. manufacturing can now easily compete with their products. Since the Yuan has hit this level, they have allowed it to move a bit more slowly down, and even allowed the Yuan to weaken a bit late last year.

It seems to be a sign they want their manufacturers to compete as much on quality as on price. If you look at the verbiage in the 12th guideline, this is something China is attempting to promote within the country.

 It’s July 2013 right now, so we are about 1/2 of the way through the 12th guideline. There are less specific targets in this guideline – I think this is due to the global financial crisis making hitting targets difficult in the prior plan. But the plan clearly wants to continue to boost domestic consumption, increase the service sector as a share of GDP, and reduce the share of GDP for manufacturing.
There is no doubt China is facing some serious challenges with their real estate market and reliance on massive infrastructure projects. The recent tremors in the credit markets could end up causing serious world-wide economic stress.
However, it’s important to know some of what is happening today is really part of the plan for China. China is following their industrial policy guidelines and trying to hit real targets in their economy. The recent fall in manufacturing almost certainly is largely driven by explicit, conscious choices of industrial policy.
Update: Sam Ro provides a fantastic chart/diagram on what is going on in China today:


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31 Comments on "Is lower Chinese Manufacturing all part of the Plan?"

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3 years 11 months ago

Michael Sankowski
Vietnam can’t compete with China in some basic way – Vietnam isn’t large enough to make enough.

I’d phrase this the other way around. Vietnam competes with China to get some low-cost export contracts – if the Vietnam government can capture a tiny fraction it will be a big boost to Vietnam. Vietnam is happy to ‘compete’ on price for lower margin goods. China – as a government – doesn’t compete with Vietnam, because Vietnam simply can’t capture enough volume to really matter.

I’ve always thought that China’s low quality manufacturing will eventually clash with the cultural desire to be the best. Eventually Chinese manufacturers will want to sell to upscale Chinese consumers – and thus quality.

I think India is further away than you estimate. The physical and social infrastructure aren’t there. Maybe the SEA group of Vietnam + Thailand + Philippines + Indonesia is closer, not sure.

Philip Diehl
3 years 11 months ago

True, today. But the Japanese were in the same position vis-a-vis the US in 1950, worse actually given the devastation of the war. 20 years later they had killed off US electronics manufacturing and were taking big bites out of US auto manufacturing.the pace of this process has greatly accelerated in the last 50 years. David Halberstan tells this story in The Reckoning.

IMO, the SEA countries and Bangladesh, as a group, are in a similar situation with China, and other emerging markets will step on the conveyor belt behind them. Evolve up the value chain or die, especially if you have a social compact like the Chinese have.

The Koreans pulled this off and their social contract evolved to transform an authoritarian regime into something closer to a liberal democracy.

I suspect the Chinese economic planners recognize that the days of central planning and demand creation are numbered and that a gradual transition to decentralized, consumer-driven demand is necessary to sustain economic growth and preserve their hold on power.

3 years 11 months ago

Koo sees China hitting the Lewis Turning Point:

Richard Koo On Why Labor Tension In China Is Now Set To Explode

Philip Diehl
3 years 11 months ago

Seems like the focus on quality reflects the Japanese, Korean, Indian developmental models of launching their economic transformations from a base of high-volume, inexpensive products , then moving up the value chain to higher-quality products with larger margins. To some extent this is by design, but it also reflects intensifying competition from countries with lower labor costs and at an earlier stage of development that are following the same well-trod path.