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After weathering devastating lockdowns and economic disruptions since 2020, China’s manufacturing numbers looked better than expected in the first couple of months of 2023. However, recent data coming out of Beijing reveals the story is far from over.

China’s Manufacturing Woes Far From Over

China’s manufacturing slump should not be viewed as either an early signal of an impending global recession or merely a passing aftershock of the COVID crisis. Put simply, the reality is bigger then either of those trends and will only worsen in coming years and decades.

China’s Manufacturing Numbers Q3

Optimism abounded when the January and February numbers were released showing China’s manufacturing sector had expanded faster than expected. Indeed, the pace of expansion was greater than any other period in their previous decade

According to the National Bureau of Statistics in China, their manufacturing purchasing managers’ index or PMI reached 52.6 in February, up from 50.1 in January. This was cause for optimism, as it was higher than the 50-point mark which delineates between expansion and contraction and because it was higher than the prior forecasted mark of 50.5. China hasn’t seen manufacturing expansion like this since 2012.

China had recently ended their draconian Zero COVID policy, which had crippled the nation’s economy. 2022 was the worst economic year China had experienced in over half a century. But with factories finally able to fully re-open, and consumer demand at all-time highs, China’s manufacturing seemed to have hit a sweet spot. 

But a few weeks ago, the March numbers were released. In a reversal, the manufacturing purchasing managers’ index dropped to 51.9. Optimism faded, because, while this is still in expansion territory, it reaffirms the challenges China’s recovery faces

While the services sector is growing at an impressive rate, the housing sector is declining. And manufacturing exports remain rather weak. The export order sub-index is flashing warning signals, dropping to just 50.4 in February. And Chinese industrial firms are making smaller and smaller profits each month this year. One or two months in the black just do not erase these factors.

China’s Manufacturing Prospects Long Term

Unfortunately, this data points to a deepening of China’s ongoing economic and industrial crisis. We are not watching the ups and downs of a recovering economy. On the contrary, we are observing the early stages of a shift in the global manufacturing order.

China is losing global market share as the world’s manufacturer. And this was not brought on by the recent COVID crisis or any recent event. Really over the past decade, China’s manufacturing prospects have been on the decline as more and more companies around the world find alternative locations to outsource their production to. As the popularity of globalized supply chains has waned, Mexico has become an extremely popular manufacturing destination for North American consumption. Brazil is attracting new FDI each year. Even China’s neighbors have also seen an uptick in foreign investment as manufacturers seek an alternative to the country’s rapidly rising labor costs, porous IP protections, and increasing tariffs. 

Fuel prices have also contributed to the nearshoring trend, as companies seek to manufacture nearer to home in order to decrease transportation costs. The recent lockdowns and repressive regulations only accelerated this trend.

A New Era for China

Another concerning factor at play in China’s slide is the country’s declining birth rate. Recently, China recorded a negative birth rate for the first time in over six decades. And India is poised to overtake the country sometime this year as the most populous on earth. After decades of a one-child policy, only recently relaxed to allow up to three, China’s culture no longer values having families. Analysts predict the country’s population will shrink by a staggering 50% before the end of the century. 

As a result of China’s aging and dwindling population, GDP has been diminishing steadily for years. Experts predict the services industry will become China’s predominant sector, as seniors and the disabled make up an increasing percentage of the overall population. But conversely, factories will continue closing, dethroning manufacturing as China’s primary economic driver likely within the decade.

Already, China’s Dongguan city in the Guangdong province is feeling the heat. Once heralded as the heart of China’s manufacturing and called the “world’s factory within the world’s factory,” the city is seeing its long-time manufacturing institutions fold.

In fact, the entire Pearl River Delta region, the country’s manufacturing heartland, is rapidly scaling down. This includes many of the quintessential “Made in China” manufacturers, the thriving and resilient factories that employed hundreds of thousands of employees and weathered previous economic downturns. Having endured 2022 and the end of Zero COVID, these factories expected a turnaround. But instead, they’ve seen a worsening of conditions. Global demand for their products is shrinking. And they just don’t have the labor force they once had.

It seems that, occasional good numbers notwithstanding, China is in transition. The manufacturing might of yesterday is giving way to a more tenuous and feeble future. The country will likely endure additional ups and downs in the next few years. Many corporate leaders still rely on China’s entrenched supply chains and are hesitant to relocate. These are only part of the change. Look for a continued and sustained deceleration of manufacturing and economic activity there as China’s manufacturing woes continue for the foreseeable future.

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