China to move production capacity offshore

With the ructions in the South China Sea having monopolised the China headlines of late, a key PRC policy initiative possibly more significant for the expansion of China’s influence regionally and globally has passed under the radar.


In April, at the Lanting forum held in Hebei, PRC Foreign Minister Wang Yi gave a speech entitled ‘Promote industrial cooperation for common development’. He noted that the forum was intended as ‘a new platform for provinces and cities such as Hebei to expand exchanges and industrial cooperation with other countries’. Wang then moved on to the crux of the speech:


China is speeding up economic structural adjustment, moving from the world factory to a global production base for sophisticated equipment. The relocation of high-quality production capacity overseas is an important step to relieve the relatively saturated domestic market and improve the quality and efficiency of the Chinese economy.


The Foreign Minister then proceeded to suggest where this production capacity might move to:


Strengthening international industrial cooperation serves the needs of developing countries. Many developing countries in Asia, Africa and Latin America are in the early stages of economic take-off or industrialization and urgently need large amounts of external capital, equipment and technologies.


Chinese offshore economic activities are certainly nothing new, but up until now, Chinese foreign investment has tended to be concentrated in energy, mining, finance, transport and real estate. In Australia, for example, investment in manufacturing constitutes just two per cent of total Chinese investment.


While the detailed specifics and processes will only gradually become apparent, there have been some further policy statements which lay out the general framework of the new strategy. On 20 May, at a press conference called by the National Development and Reform Commission, Gu Dawei, who heads the Commission’s Department of Foreign Capital and Overseas Investment, announced that ‘China encourages its enterprises to adopt new business operating modes, such as banding together to go overseas, to build industry cluster zones and industrial parks’. He added:


We also encourage large Chinese enterprises to drive small- and medium-sized supporting enterprises of the same industrial chain to go overseas, so as to promote China's international capacity cooperation with complete industrial chains.


China is the world’s largest manufacturer, with exports last year of 14.4 trillion yuan (US$2.34 trillion). Moving some of the saturated production capacity offshore thus makes eminent economic sense. Gu Dawei assured those countries to which whole industrial chains would be transferred, that it would help them beef up their local manufacturing capability. Mr Gu also promised these countries that ‘The core of the international industrial cooperation is to encourage our advanced capacity to go global’. Essentially, however, this project is one intended to shift China’s lower-level manufacturing offshore, while the country pushes its own industries to move towards Industry 4.0 through the Made in China 2025 initiative, a 10-year manufacturing upgrading program also announced in May.


To aid Chinese manufacturers move offshore, China has established a new company known as CIC Capital, an overseas direct investment arm of sovereign wealth fund China Investment Corporation (CIC). Other funding sources which reflect the target countries of this initiative—the China-Africa Development Fund and the China-ASEAN Investment Cooperation Fundwill also be drawn on. The US$40 billion Silk Road Fund, although nominally dedicated to infrastructure funding, will provide a further source of funds. This movement offshore by Chinese manufacturing will undoubtedly be intimately tied into the broader Chinese regional initiatives of the Silk Road Economic Belt and 21st century Maritime Silk Road, the Asian Infrastructure Investment Bank and the further internationalisation of the Renminbi.


There are of course some precedents for Chinese special economic zones and industrial clusters being established abroad. The Haier industrial park in Camden, South Carolina dates from 1999, and Bräutigam and Tang detail 19 Chinese economic zones across Africa, Southeast Asia, Pakistan, Russia and Mauritius established over the last decade. The Malaysia-China Kuantan Industrial Park is a more recent initiative and China is now eyeing Batam and other potential SEZ sites across Indonesia. Recently, Africa has been further promoted as a Chinese production base.


While the immediate benefits to be enjoyed by Chinese enterprises moving their manufacturing bases to Southeast Asia and Africa will be reduced costs and closer proximity to markets, there are the longer-term effects which need to be considered by all sides. When an economy as massive as China’s moves much of its lower-level production capacity into relatively weak developing countries in Asia and Africa, the influence on those countries will be nothing short of enormous.


Local industrial policies and structures will be subject to unprecedented external influence, while control over markets, labour and export policies will see profound change. Dependency on China—both economic and political—will likely grow. The process is spelt out implicitly in a People’s Daily article. Thus, while ANZ Bank trumpets ASEAN as the next horizon in Asian economic growth and manufacturing, it completely ignores the key point. Who will be controlling the capital and productive capacity—and thus, the economies—of the region?

Chinese investment abroad is already growing dramatically. In the first quarter of 2015, non-financial companies from China invested a total of US$25.8 billion abroad, up 29.6 per cent from the previous year. Thus, while we continue to monitor the contestation for control over islands, maritime space and resources in the South China Sea, we also need to be cognisant that a fundamental shift is taking place in China’s economic relations with its neighbours.



Flagpost is a blog on current issues of interest to members of the Australian Parliament

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