China targets an economic future that allows it thrive despite US competition

In the middle of a vast warehouse in Xiangyang, a city of five million people in China’s central Hubei province, men and women in red, zip-up jackets were packing bottles of imported cosmetics into brown, cardboard boxes. The packages would soon be among the millions delivered throughout China each day in what has become the world’s biggest ecommerce market.

As they sealed each box with sticky tape and attached labels by hand, theirs appeared to be the only function in the Cainiao Cross-Border Central Warehouse that was not automated. Warehousing, shelving, sorting and shipping are all conducted by robots in a facility sited within a complex that has its own customs controls.

Goods arriving into China at coastal ports can travel directly to Xiangyang and clear customs through unmanned checkpoints that use sensors to collect data including weight.

According to official figures released on Tuesday, Chinese industrial production was 5.6% higher in April than a year earlier and retail sales rose by 18.4%

Cainiao Group president Wei Chenyu said he was confident that the warehouse would continue to get busier now that China’s zero-Covid policy was in the past.

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“Chinese consumers are crazy about these western brands and we’re optimistic about this year’s sales volumes and we are expanding the import of good quality products from other countries,” he said.

According to official figures released on Tuesday, Chinese industrial production was 5.6 per cent higher in April than a year earlier and retail sales rose by 18.4 per cent. But the comparison was with a period in 2022 when Shanghai was in lockdown and business and consumer activity took a nosedive.

The figures were below most analysts’ expectations and they fuelled doubts about the strength of China’s economic recovery following the lifting of coronavirus restrictions. The International Monetary Fund is expecting China to account for 34.9 per cent of the world’s economic growth this year, compared to Europe’s 7.1 per cent, so the strength of the Chinese recovery will have a big impact beyond its borders.

Tuesday’s data is the latest in a series of disappointing figures in recent weeks, marked by a sharp fall in imports, consumer prices staying flat, property sales remaining below pre-pandemic levels, borrowing falling and youth unemployment climbing above 20 per cent. Optimists put April’s figures down to Chinese consumers taking a breather after a frenetic first three months of the year but some analysts fear the post-Covid recovery is already running out of steam.

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Three years of zero-Covid during which China effectively closed off from the world and rising geopolitical tensions have reinforced some foreign companies’ anxieties about Beijing’s approach to business under President Xi Jinping. The Communist Party has made a point in recent weeks of stressing the importance of the private sector and signalling that there will not be a repeat of the targeting of business figures such as Alibaba founder Jack Ma, who recently reappeared in public in mainland China after a long absence.

At a meeting of the party’s top economic committee he chaired earlier this month, Xi stressed the importance of the “real economy” and a modern industrial system as the material and technological foundation for China’s future. And as the United States and the European Union talk about “de-risking” their economies from excessive reliance on Chinese supply chains, China is also pursuing a path of greater industrial self-reliance.

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“The leadership seems intent on reorienting the government priorities towards this geopolitical competition with the US. And the overriding economic priority is to build up the economy so that it can survive, prosper and prevail in that competition,” said Andrew Batson, China research director at Beijing-based economic research firm Gavekal Dragonomics.

“What I think is going on is that the government wants to essentially drive growth by investing in a whole of society effort to reshape the Chinese economy for this geopolitical competition with the US. They think that not only is this a national security priority, but it is also something that can be a growth driver for the economy. So I think the first of those is something that we’ve known already over the last couple of years. And what I think is interesting is that now we’re getting this indication that they see this refashioning of China’s industrial base not just as a security issue, but also as the core of their economic policy.”

Tenglong Automobile in Xiangyang, whose products include intelligent trains, new energy buses and unmanned vehicles, is the kind of company at the forefront of China’s industrial strategy. It provides entire transport systems for smart cities, including stations and networks as well as vehicles.

Zhou Shengming, vice-general manager in charge of production and technology, said that after the lifting of coronavirus restrictions, orders are coming in again from within China and abroad. “This year, new energy vehicles are doing well, while traditional vehicles are in a downward trend. The export of new energy vehicles has great advantages,” he said.

“Urban public transportation, commuting and short-distance tourism are becoming increasingly important in the domestic market. Previously, fuel-powered vehicles were our main focus, but now new energy vehicles are the main focus.”

What foreign competitors have discovered is that Chinese companies cannot only produce EVs faster and more cheaply but to a higher standard

Electric vehicles (EV) have proved an undisputed success story for Chinese industry in recent years as domestic brands like BYD, Nio and Geely have outpaced foreign brands in the home market and are now setting their sights on Europe. Last month’s Shanghai Auto Show was an eye-opener for European and American executives who had not been in China for more than three years.

“Going from the showroom of one of the Chinese brands into Volkswagen’s was like going from a dance club into a museum with a string quartet playing,” said one German executive.

What foreign competitors have discovered is that Chinese companies cannot only produce EVs faster and more cheaply but to a higher standard. Traditional European car manufacturers are struggling to catch up with a Chinese EV industry that can innovate faster as it responds to the demands of a consumer base where the average car buyer is 35 years old, more than 15 years younger than in Europe.

The success of China’s EV industry owes something to the decision by Tesla and others to make the country their global manufacturing base, something Batson does not believe could happen in the current geopolitical climate.

“I’m not sure that the EV industry is a model that’s easily replicable. I think generational transitions in the single most important durable consumer good don’t come along very often. So there’s not necessarily like another consumer product that’s comparable to cars that’s going to go through a comparable technological transition out there,” he said.

“I think it would be a lot harder to make that kind of decision now. So the particular model that China followed in EVs, which was heavily domestically focused but also relied on this global manufacturing base, I think maybe harder to do again in the future.”

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Some foreign manufacturing firms have adopted a “China plus one” strategy in recent years, establishing secondary operations in nearby countries such as Vietnam while maintaining a presence in China. Others are focusing their Chinese manufacturing operations on supplying the Chinese market rather than as a global hub.

“China is the world’s second-largest economy. It’s not going away. If you want to be a globally successful producer of consumer or producer goods, you need to have a presence in the Chinese market. So for many companies that hasn’t changed, nor can it change in a reasonable way,” said Batson.

“But there’s been another aspect to that, which is using China as a manufacturing base to supply markets outside of China. The trade war with the US, various supply chain disruptions, the general perception of higher geopolitical risk due to the bad state of US-China relations, I think have all kind of changed people’s thinking on this.

“I think there’s the shift at the margin here, but none of this stuff happens very rapidly. Factories take a long time to build, so this is kind of a multiyear process and I don’t think you’re going to see dramatic exits from China or dramatic new investments in India or Vietnam or wherever people talk about. But I do think there has been a real shift in people’s understanding of the balance of risks relative to China is going to affect the choices that they make here.”

Unaffordable housing is one of the challenges facing young people in China but the most acute problem for 16- to 24-year-olds is unemployment, which is above 20%

China’s troubled property market has performed better than expected so far this year but a number of big, private sector developers are in trouble as a shrinking population suggests that the basic demand for housing is close to its peak. The government’s long-term strategy has been to move the property market away from speculation towards more social housing and state-owned enterprises are taking a growing share.

Unaffordable housing is one of the challenges facing young people in China but the most acute problem for 16- to 24-year-olds is unemployment, which is above 20 per cent. The country is producing a record number of university graduates at a time when there are fewer white-collar jobs but the demand for blue-collar workers is expanding.

Batson is optimistic about the prospects for China’s domestic economy in the second half of this year as the effects of the immediate, post-Covid recovery trickle downwards, supporting employment for those on lower incomes. But he thinks foreign investors should prepare for a shift in China’s industrial strategy as it moves up the value chain without relinquishing the low end to other countries.

“They’re going to feel that there’s more of a need to keep those kind of basic components within China for kind of security and controllability purposes,” he said.

“I think that moving up the value chain, this kind of rhetoric is based on the theory of globalisation where you have this geographic specialisation at different points in the supply chain. So as one country moves to the high end of the supply chain, another country can come and occupy the medium and lower end and then high levels of global trade make the whole thing work.

“Chinese leaders have seemed to signal recently we’re moving into an era where countries don’t take globalisation for granted, they don’t take high levels of trade for granted and they see a higher necessity of controlling for risks. And that implies a different orientation towards their position in the value chain and not necessarily wanting to vacate positions in the value chain as they move up.”