Slowing Chinese growth sees shift to services from manufacturing

For decades now the conventional narrative on China has been massive inflows of capital for manufacturers to take advantage of the cheap labour and extensive infrastructure.

Despite intellectual property transgressions, a tough regulatory environment and structural complications, China was cheap and efficient, and enjoyed a foreign direct investment (FDI) boom as major companies, including Irish firms such as Liam Casey's PCH, set up factories.

China remains the number one global destination for foreign investment. FDI grew at its fastest pace in four years in January, up 29.4 per cent year-on-year to $13.9 billion (€12.56 billion).

But now the narrative is starting to shift. The focus is on the services industry at the expense of manufacturing, and on feeding the swelling domestic market.

The slowdown is having an impact on the manufacturing sector and Chinese media in recent weeks have been bemoaning the flight of capital into neighbouring markets, as costs rise and economic growth slows.

In his work report to China's annual parliament, the National People's Congress, last week, prime minister Li Keqiang said that China will lower the annual GDP growth target to about 7 per cent from 7.5 per cent, the slowest in 22 years, in light of the ongoing property downshift and deflationary headwinds.

This is making things more difficult for overseas firms. General Motors’ Chinese joint ventures reported a 0.8 per cent decline of deliveries to 600,853 units in January and February, because of weak demand for microvans and Buicks.

It has also led to companies moving to cheaper southeast Asian countries to manufacture. Costs have been lower in Vietnam and Indonesia for a long time, but the infrastructure wasn't there, but that has changed and many countries have made major advances in the past few years.

Microsoft is closing its plants in Dongguan and Beijing as part of the Nokia takeover, and moving production to Vietnam, with 9,000 layoffs.

Also there is growing pressure on companies to relocate manufacturing to their home markets in countries like Japan and the US.

"We've gotten used to China as a low-cost assembler to the world," Geoffrey Garrett, dean of the Wharton school of business at the University of Pennsylvania, told Yahoo! Finance. "That reality is changing."

Japanese watchmaker Citizen announced just before Chinese new year that it was shutting its manufacturing factory in Guangzhou, at the cost of 1,000 jobs. In January, the electronics giant Panasonic said it would stop making televisions in China because of rising costs.

The Royal Bank of Scotland last week announced a restructuring plan that will include selling or winding down its businesses in markets including China and Hong Kong, although this will also affect Indonesia, Malaysia, South Korea, India and Thailand.

Foreign firms are still upbeat on China, but the tone is changing. The overall message of a report from the Shanghai American Chamber of Commerce remains positive, and US companies in China are profitable and optimistic.

“However, high operating costs, the risk of an economic slowdown, and perceptions of regulatory bias against international companies are tempering long-term optimism and the growth outlook of many companies,” the report said.

In the five-year outlook, the number of companies in the “optimistic” category dropped 10 percentage points (from 53 to 43 per cent).