“When the wind of change blows, some build walls, while others build windmills.” In his speech during the plenary session on ‘The Global Impact of China’s Economic Transformation’, Li Keqiang, Premier of the People’s Republic of China lobbed this idea of facing volatile economic situations. He was speaking at the annual meeting of the World Economic Forum in Davos on January 21, 2015.
Evident in the numbers
Since then turbulent winds have blown in the form of trade wars and the COVID-19 crisis, and China has perhaps created more windmills. In 2020, when other economies were struggling to cope with the effects of the novel coronavirus pandemic, China’s manufacturing output was $3.854 trillion, registering an increase from the previous year. According to official data from China’s National Bureau of Statistics, China’s economy grew by 8.1% in 2021, aided by growth in industrial production. The gross domestic product (GDP) growth in the fourth quarter was 4%, faster than the 3.6% forecast by a Reuters poll. Industrial production rose by 4.3% in December 2021 compared to 2020. Fixed asset investment for 2021 grew by 4.9%, surpassing expectations of 4.8% growth. Investment in manufacturing grew by 13.5% in 2021 from a year ago, with that in special purpose machinery rising the most — up by 24.3% on a year-on-year basis. In 2021, overall retail sales grew by 12.5% from the prior year’s contraction, and also bettered the levels in 2019. China’s gross domestic product grew by 2.2% in 2020 from the previous year, according to media reports.
The discourse that emerged in 2021 was that a cocktail of COVID-19, geopolitical tensions and high tariffs would move factories away from the so-called ‘world’s factory’. There was expectation that the $4 trillion worth of manufacturing which is happening in China (which is more than the GDP of India), would get dispersed to new locations. The epicentre would shift to new settings and the scramble for a share in the manufacturing pie could result in the rise of the rest. Even a small share could yield benefits for other emerging economies as China accounts for about 30% of global manufacturing (equal to that of the United States, Japan and Germany put together). This could also open up new avenues for trade for them as China was the world’s biggest exporter in 2020-21, accounting for 13% of world exports and 18% of world market capitalisation. While the rest of the world debated and waited for the next mega trend that was to come, ‘the de-factorisation of China’, the Chinese economy seems to have recovered from a short-lived pandemic blip.
When Chinese President Xi Jinping flagged the idea of ‘dual circulation’, two elements of the strategy were clear. First, there would be more reliance on ‘internal circulation’, which is the domestic cycle of production, distribution and consumption supported by innovation and upgrading in the economy. This was identified as the route for development. Second, the ‘external circulation’ intended to hasten the process of surplus accumulation would lose its primacy over time and only play a supplemental role. The centrepiece of this strategy was that China would continue its emphasis on industrialisation and cut its dependence on global trade and markets. The two circuits are expected to complement each other.
It’s ‘advanced manufacturing’
Quite contrary to the conventional linear models of growth through industrialisation was the significance of manufacturing fading overtime and services rising to predominance; China is stimulating overall growth by catalysing the industrial sector, pursuing a radical shift in its approach. China is using its increasingly skilled labour force and strategic raw materials to enhance its already highly developed manufacturing capabilities. This is pushing industrialisation toward ‘advanced manufacturing’ and higher levels of automation, which have been boosted by its world-beating adoption of artificial intelligence (AI). The effect of such a strategy is that Chinese manufacturing is moving toward a new kind of predominance in growing sectors that are less exposed to lower cost competition. These are the high-tech production sectors, which demand sophistication and reliability along with cost efficiency.
As traditional Chinese industries confront rising labour costs due to demographic changes, a widespread application of AI has emerged as an alternative to reduce operational costs and enhance efficiency. The result is a slow but drastic transformation of China’s factories — from sweatshops to shop floors of the fourth Industrial Revolution through digitising and automation. The recent economic recovery has been aided by a massive adoption of artificial intelligence. China has a significant lead over the rest of the world in AI patent applications and had overtaken the U.S. in 2014. It has also surpassed the U.S. in terms of the number of AI research publications and journal citations, according to a media report.
The manufacturing sector in China is witnessing a wave of automation and AI infusion across sectors. During the pandemic there has been a surge in the use of a combination of software, hardware and robotics. Interestingly it is not just start-ups that are leading this; even established market leaders are also increasing the uptake of AI. For example, the Hangzhou-based EP Equipment, a nearly 30-year-old manufacturer of lithium-powered warehouse forklifts, has launched autonomous models that are able to manoeuvre themselves in factories and on warehouse floors. The Yutong Group, a leading bus manufacturer with over 50 years of experience, has come out with a driverless Mini Robobus on the streets of three cities, says a media report. The increased role of robots and AI in manufacturing is slowly spreading to design, delivery and even marketing. The net effect of it is that total costs would eventually be reduced to a small increment over the cost of materials.
In the post-pandemic era, China is positioning itself in the forefront in manifesting an unprecedented change in industrialisation. It might take years for the rest of the emerging economies to shift gears to move to such a phase of industrial production. As an early mover, ‘China is laying the groundwork for setting itself up to be a leader’. There seems to be a realisation that not only how much an economy manufactures but also how adroitly it does it matters in the new era. It looks like the dividends are already evident in the GDP numbers.
M. Suresh Babu is professor of economics at IIT Madras. The views expressed are personal