Weekend Long Read: Are Chinese Industries at Risk of Hollowing Out?

Since around 2010, some Chinese industries started relocating overseas, causing declines in China's global share of certain exports. However, a recent wave of industrial relocation has raised concerns about the impact on employment in specific sectors [para. 1]. Although the short-term risks of industrial relocation are manageable due to China’s ongoing industrial upgrades and transformation, three medium- to long-term risks need attention: rapid deceleration in manufacturing growth leading to industrial hollowing-out, macroeconomic volatility, and rising unemployment in related industries [para. 2][para. 3][para. 4][para. 5][para. 6].

China’s share of global exports peaked in 2015 and declined for three consecutive years post-2015. From 2015 to 2023, China’s share in a quarter of the 1,265 subcategories of exported goods decreased by more than 1 percentage point, particularly in resource- and labor-intensive industries [para. 7][para. 8]. Industries reliant on natural resources have shifted to resource-abundant countries like Australia, which saw its share of mineral exports increase by 18.45 percentage points from 2015 to 2023 [para. 9][para. 10]. Labor-intensive industries, especially in mid- to low-end manufacturing, have moved to emerging economies such as Vietnam, India, and Malaysia [para. 11].

China has experienced two waves of overseas expansion: the first around 2010, involving labor-intensive companies moving to low-cost economies, and the second starting around 2021. The first wave saw significant outward direct investment in non-financial sectors, contributing to the decline in labor-intensive exports post-2015 [para. 12][para. 13][para. 14]. In the ongoing second wave, most companies are still in the planning stage, so large-scale production shifts and their impacts on exports are yet to be seen [para. 15]. China's nonfinancial outbound direct investment surged to 130 billion yuan ($18.3 billion) last year, second only to 2016 [para. 16].

The fundamental reasons for industrial relocation include rising labor and raw material costs in China. The relocation allows for domestic industrial upgrades and transformations, moving industrial chains towards higher value-added segments [para. 17]. This trend also enables Chinese companies to benefit from favorable tariff policies in developed economies and increased policy support in emerging markets [para. 18]. Trade disputes and geopolitical risks further accelerate the shift of global industrial chains to low-tariff and politically friendly regions [para. 19].

The second wave of overseas expansion is led by sectors like automotive, machinery, and electrical equipment, which are globally competitive. These companies are motivated by the need to explore new markets due to trade restrictions and intense domestic competition [para. 20][para. 21]. The destinations for expansion now include developed economies like the U.S., Mexico, Germany, and Hungary, in addition to Southeast Asian economies [para. 22]. However, companies are retaining key industrial links within China, relying on the domestic supply system [para. 23]. China’s simplified overseas investment management and robust industrial chain system provide additional support [para. 24][para. 25]. External challenges include rising protectionism and potential trade disputes, which necessitate stronger management capabilities [para. 26].

In the short term, the impact of industrial relocation on China’s overall exports is limited, with competitiveness shifting to mid- and high-value production stages. For instance, despite the textile industry’s relocation to Vietnam, China remains a significant source of foreign value added (FVA) in Vietnamese textile exports [para. 27][para. 28]. China's global export share rose to 14.2% in 2022, slightly higher than 13.7% in 2015 [para. 29]. However, long-term risks of hollowing-out industries, macroeconomic fluctuations, and rising unemployment due to industrial relocation remain concerning [para. 30][para. 31][para. 32][para. 33][para. 34][para. 35].

To mitigate these risks, China should promote higher levels of opening-up, oppose unilateralism and trade protectionism, and support the multilateral trade system. Providing fiscal and tax support to domestic companies expanding overseas and simplifying these processes are recommended [para. 36][para. 37]. Establishing new competitive advantages to attract high-quality foreign investment, leveraging market demand, and increasing scientific research investments to advance key technologies will also be crucial for enhancing the resilience of China's industrial and supply chains [para. 38][para. 39][para. 40][para. 41].