China to Remain ‘The World’s Factory’ Despite Challenges: Decoupling China – Pessimism vs. Optimism

Despite U.S. Restraints, China Remains the World’s Top Exporter
China Increases Investments and Exports to U.S. Allies
No Manufacturing Superpower to Replace China Yet
JP Morgan: “China is not an Uninvestable Country”

Despite economic uncertainties and U.S. restraints, China is expected to maintain its status as the “factory of the world.”

Business Insider, a U.S. business news outlet, reported on the 12th (local time) that despite facing various crises such as a real estate crisis, deflation, a stock market crash, and intensifying U.S.-China competition, no other country could replace China as the world’s top manufacturing nation.

Despite worsening U.S.-China trade relations due to tariffs and geopolitical tensions, China remains the world’s largest exporter. China’s global market share is about 15%, the highest level in history, excluding disruptions caused by the COVID-19 pandemic.

While the U.S. is increasing imports from third countries like Vietnam and Mexico to replace China, China is responding by making substantial investments and exports to these third countries.

“China has made more investments and exports to U.S.-designated alternative import countries over the past few years,” strategists Stephen Jen and Joana Freire of the hedge fund Eurizon said. “While the U.S. may have won the trade dispute, China has not lost.”

There is no country capable of replacing China’s role. China’s production capacity is much higher than that of other competing nations. Additionally, Mexico’s and Vietnam’s export prices have increased by 30% and 31% over the past three years, respectively. Experts pointed out that the increase in export prices, which considerably outpaces the inflation rate during the strong dollar period, indicates stress and pressure on the manufacturing capabilities of exporting countries other than China due to a lack of adequate manpower, infrastructure, and transportation.

Although the world may gradually distance itself from China, it is challenging for smaller countries to undergo rapid changes to transform into manufacturing hubs equivalent to China. “There is doubt whether a ‘second China’ can truly become like China’s equivalence,” strategists Jen and Freire concluded. “No country possesses the manufacturing capacity to replace China.”

Despite economic headwinds, viewing China as an uninvestable country is not feasible. John Bilton, Head of Global Multi-Asset Strategy at JP Morgan Chase, stated, “We cannot treat the world’s second-largest economy as an uninvestable target,” and “There are still opportunities to invest in China, such as government bonds or stocks.” He further explained, “For instance, the massive scale of China’s bond market, the relatively small size of foreign funds, and the potential for interest rate cuts due to deflation are advantages when investing in Chinese government bonds. Moreover, there are enormous investment opportunities in stocks related to various themes necessary for China’s economic development, such as finance, aging, transportation, and services.”