Industrialized China is alive and well despite concerns of an economic slowdown. It doesn’t look the same at first—or at least, what everyone is used to. Last week’s data painted a gloomy picture: industrial output grew 3.8% from a year ago, lower than expected, fixed investment grew at a slower pace than forecast, and credit was weak. Property figures, long taken as a sign that authorities were going to put developers’ debt-fueled building in shambles, were disappointing all around. Goldman Sachs Group cut its gross domestic product (GDP) estimate for China, slashing its estimate for this year to 3% from 3.3 percent.
Other numbers, however, paint a different picture: Beijing’s priority sectors are doing just fine. China electric vehicle (EV) battery installations grew 114% in July, while both EV production and sales grew by more than 100%. Overall supplier delivery times are currently well above average levels since January 2020, but for emerging industries that include high-end equipment manufacturing, EV and other sectors, have accelerated over the past few months. Also, despite what sentiment surveys tell you, FDI in China’s high-tech manufacturing grew 31.1% in the first six months of the year. South Korean investment climbed 37.2%, while the US was up 26.1%.
Assuming that the whole Chinese economy is going down, is missing the point. In fact, Beijing’s industrial priorities on the development of high-tech sectors have not changed much from the priorities set out in the recent Five Year Action Plans. This week, the ministries of science and technology and finance in Beijing laid out a plan for 2022 and 2023 for measures, including financial support and tax incentives, to boost companies’ technological capability and ability to innovate both onshore and offshore.
Investors and China watchers didn’t want to believe that the world’s factory floor could selectively upgrade itself and gain market share as it has. Don’t get me wrong—this isn’t a bullish take on China’s sudden technological growth. It is about taking an in-depth look at the changing anatomy of the industrial economy of the country. So, expectations fall short of what China Inc. used to be.
It is already moving up the value ladder. The entire supply chain around it, including EV battery technology and metal processing, has found a home in China. Priority sector firms have continued to increase their capital expenditure. Longhi Green Energy Technology, a solar panel materials maker with a market capitalization of about $70 billion, announced last week that it was spending an additional 6.95 billion yuan ($1.02 billion) on top of the 19.5 billion yuan it already has in solar. An announcement has been made to increase the capacity for energy. Cell and module production project in Ordos, Inner Mongolia. Warren Buffett’s Berkshire Hathaway-backed BYD signed a deal to invest 28.5 billion yuan in a battery production plan. Chipmaker Semiconductor Manufacturing International said it was not planning to cut its $5 billion spending plan, its highest outlay compared to the amount it spent annually in the past five years. Expenditure in the renewable energy sector – just over 80% of new capacity in the first half of this year – grew 22.4% in the second quarter.
The world’s top industrial technology firms also know how much they need China. For example, the likes of high-tech Dutch chip equipment maker ASML Holding have acknowledged this. In his latest earnings call in July, the firm’s chief executive, Peter Weinink, said “we need to realize that China is a significant player in the semiconductor industry” with the manufacturing capacity to make some sort of chip “the world needs.” Still, ASML is steeped in geopolitics, with the US pressuring the Netherlands to ban the Dutch company from selling it to China.
There’s no doubt that’s bad news, but if you look at past headlines on rolling lockdowns, troubled firms in non-priority sectors, and power rationing, it’s clear Beijing’s intent remains solid. So while some firms in Sichuan will have to balance electricity use and production volume, others have said their operations have not been affected. In fact, an optimistic view is that as China builds up its advanced factory floors, the country may eventually ease unemployment pressures, especially for a growing mass of university graduates without jobs.
Market memory is short, but it is important to remember that China’s economic problems—its crumbling asset sector, crumbling small banks and foamy short-term money market—have a long time to build. Then all this is hardly a surprise. It’s time to look through a new lens.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia.
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