CHINA WILL HOLD ITS POSITION AS WORLD’S TOP WIRE AND CABLE SUPPLIER

How has China achieved this ascendancy to the world’s top producer and top exporter of wire and cable products, and can it retain this position? The growth of China’ wire and cable industry has been achieved as part of the county’s transition from a centralized economy to a market economy, as well as its transition from a rural agrarian economy to an urban industrialized economy. No other country is likely to duplicate this feat, considering the following factors:

•  Size of China’s labor force;
•  The strong central government’s role, along with a long history of effective government bureaucracies;
•  Government policies to promote domestic business investments by offering subsidies in such areas as facility and energy costs, by structuring tax breaks and other incentives, and by making strategic use of value-added taxes to promote domestic manufacturing;
•  Other progressive government measures to encourage foreign investment and to support key industries in electronics manufacturing, transportation, electric power, and ICT – information and communications technology.

This figure shows that China’s wire and cable industry has “outperformed” the rest of the economy, with a faster rise than domestic GDP. The data for wire and cable exports are based on the Global Trade Information Services’ database of trade statistics. The line illustrating the data for China’s percent of wire and cable exports refers to the percentage that China’s wire and cable exports are of the world’s total of wire and cable exports.

How Long Can China Continue to Grow?

China’s rapid economic development has contributed to a surge in demand and prices of industrial metals and minerals. In recent years, some industry observers have expressed concerns that China’s growth could end abruptly due to over investment, weak financial results, and subsequent business failures. Research by CRU’s economics team and its Beijing office finds that, despite the current short run issues, China’s economic development is still in its infancy. The boom could run for decades and continue driving metals and minerals markets:

•  The structural underpinnings of the Chinese boom are deeply entrenched, and beyond the coastal areas, China’s industrialization is only just beginning. There is little in the fundamentals that lead to conclusions that China’s growth situation will change adversely for its wire and cable manufacturers in the foreseeable future.
•  China’s economic development does not look out of line with its Asian predecessors – the major difference is China’s sheer scale.  However, after 30 years of rapid growth, China is still a poor country and its stage of development is now similar to Korea and Taiwan in the early 1960s.
•  Chinese construction is currently heavily weighted towards infrastructure and new residential building. Demand is forecast to be very strong in these two sectors on trend, for deep-seated strategic and demographic reasons.
•  Chinese industry is evolving - it is not just a manufacturer of clothes and toys for export, but it is moving up the value added chain and meeting domestic demand. This can continue to support growth in industrial production in excess of GDP - and industrial production could become more, rather than less, metals intensive.
•  Indeed, the key issues are not whether there will be sufficient demand from China, but whether the global metals and minerals industries will be able to satisfy China’s needs and how the environment will cope with this boom.

Could China’s Economy Deflate?

One common fear is that China's rapid growth in all industries could be out of proportion with the real opportunities, leading to a broader economic collapse. There have been suspicions, for example, that official figures are thought to overstate investment as a share of GDP and adjusted figures show that China has yet to hit the peaks seen in other Asian countries. Given the current dynamics, the implication is that, on average, investment growth will continue to exceed GDP growth over the next 5 years or so.

Differences Among China’s Regions

The coastal region drove growth from 1978 through the millennium, but the central and western provinces have caught up and approximately kept pace over the past five to ten years, and in some case, appear to have outpaced the coastal region. The centre of China’s growth appears to be shifting inland. Shanghai is more advanced than other Chinese provinces, but its stage of development relative to the US is equivalent to Hong Kong and Singapore in the early 1970s. In 30-plus years, the annual growth in Shanghai’s per-capita GDP growth could be close to 4.5%, and the rest of China would likely be growing faster than this.
US experience shows that it can take many, many decades for the process of convergence in regional living standards to run its course. During this process, less developed regions can experience prolonged periods of relatively rapid growth. However, absolute convergence in living standards is unlikely to occur, reflecting natural resource endowments and first mover advantage – the regions that develop first tend to remain the most developed. However, US experience also shows that a coastal location is not a prerequisite for achieving GDP per capita levels above the national average, implying that not all of the inland Chinese provinces will remain relatively poor.

Balancing the GDP Growth

Approximately half of China’s population is now counted among the industrial and urban areas. The rural and agrarian remainder has a much lower per-capita GDP, according to China’s demographic and economic indicators. As the standard of living improves for the entire population, China’s contribution to worldwide GDP will increase. And if past performance is any indicator, China’s wire and cable industry also will continue to grow with the economy. In recent years, this growth has been partially fuelled by the cost advantages of manufacturing in China, but in the future, the extent of domestic demand also will contribute to wire and cable industry growth.