• InduQin

Some factories might leave China, but in the grand scheme of things it doesn't matter much

China still holds the cards for global supply chains, whether or not Covid lockdowns frustrate businesses in the near term.

Companies and analysts have discussed moving factories out of China for years, especially since labor costs have climbed and U.S.-China trade tensions worsened.

The pandemic has reignited those conversations. Foreign businesses talk about how executives can easily travel to Southeast Asia factories, but not China. Some point to surging exports from Vietnam as an indicator that supply chains are leaving China.

"Supply chain diversification is quite tricky because people always talk about it, and boardrooms love to discuss it, but often at the end of the day people find it's difficult to implement," said Nick Marro, global trade leader at The Economist Intelligence Unit.

When businesses had those discussions in 2020, it turned out that "China was able to remain open, while Malaysia, Vietnam were going offline," Marro said. "Really, the critical factor right now is how China plans on maintaining these [Covid] controls as the rest of the world opens up."

China's so-called zero-Covid strategy of swift lockdowns helped the country quickly return to growth in 2020. However, implementation of those measures has since tightened, especially this year as China faces a resurgence of Covid in Shanghai and other parts of the country.

'Significant' interest in Vietnam

By the numbers, China's exports rose by 3.9% in April from a year earlier, the slowest pace since a 0.18% increase in June 2020, according to official data accessed through Wind Information.

Vietnam in contrast saw exports jump by 30.4% in April from a year ago, following a nearly 19.1% year-on-year increase in March, Wind showed.

The level of manufacturing interest in Vietnam is "very significant," Vishrut Rana, Singapore-based economist at S&P Global Ratings, said in a phone interview. "Vietnam has emerged as a very key supply chain node for consumer electronics."

China still remains at the very center of the electronics network in APAC. Vishrut Rana ECONOMIST, S&P GLOBAL RATINGS

But Vietnam's exports totaled $33.26 billion in April, or about one-eighth of China's $273.62 billion in global exports that month, according to Wind.

"From China's perspective, the movement out of local manufacturing is not going to be significant enough to really alter the nature of China's role in the overall supply chain," Rana said. "China still remains at the very center of the electronics network in APAC."

Businesses still invest in China

For the first four months of the year, foreign direct investment into China rose by 26.1% year-on-year to $74.47 billion, China's Ministry of Commerce said Thursday. During that time, investment from Germany jumped by 80.4%, while that from the U.S. rose by 53.2%.

In contrast, Vietnam saw a 56% year-on-year drop in foreign direct investment to $3.7 billion in the first four months of the year, Wind data showed. Foreign direct investment from the U.S. fell by 14%.

Read More at www.cnbc.com/amp/2022/05/17/some-factories-might-leave-china-but-big-picture-it-doesnt-matter.html

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