Global supply chains and China post-pandemic

China's 'Dual Circulation' plans to increase self-sufficiency by decreasing reliance on imports and exports

The post-pandemic reassessment of global supply chains has led China to pursue a path of self-sufficiency:

  • Imports: Expand capabilities in high-end manufacturing and achieve food and energy security
  • Exports: Grow domestic demand to decrease the economy’s reliance on exports

China real GDP breakdown (%yoy)1

Dual circulation

China joined the WTO in 2001 and has grown to capture more than 10% of the global export market. China has a limited ability to continue this exponential growth, in part due to rising labour costs and worsening demographics. To reduce reliance on external demand and move up the value chain, China has introduced the national economic strategy of dual circulation. This strategy aims to achieve self-sufficiency through import substitution and domestic demand expansion.

Imports

Despite being a leading exporter, China is still dependent on imports for high-end manufacturing, food and energy. China is looking to achieve self-sufficiency through import substitution.

Key focuses for import substitution:

  • Microchip making: Issues with microchip manufacturing have caused significant supply chain disruptions globally in 2021
  • Energy security and policy: 72.6% of crude oil and 42.9% of natural gas net imported today. Likely to substitute with clean energy investment
  • High-end manufacturing: 5G, data centres, AI, EV and battery technologies
  • Food security: Soybeans, barley, sorghum, pig feed and agricultural mechanisation

Integrated circuits as a share of total imports2

Exports

Dual circulation seeks to reduce reliance on exports by increasing domestic demand. China’s demand imbalance is still among the highest globally. There is also significant imbalance across regions within China.

Key focuses for demand growth:

  • Hukou: Encourage urbanisation to enhance incomes
  • Buy China: Localise consumption of goods and services
  • Middle class: Raise millions of citizens into the middle class
  • Targeted demand: Issue vouchers to households for products

How does this impact investors with exposure to China?

Winners Losers
  • Those with exposure to China's growing status as end consumer of products – generally developed markets
  • Products where import substitution more difficult
  • Those who benefit from other countries continuing to diversify supply chains out of China
  • Taiwan (also likely biggest losers from Regional Comprehensive Economic Partnership deal), Malaysia, South Korea and Singapore likely to be most affected given the key products it exports to China
  • China to become competitor in third markets as it gains new capabilities. 5G/data centres/AI/new energy vehicles
  • Food and energy exporters to China – Australia, Brazil, Chile, New Zealand.
  • Semiconductor exporters to China – Korea


To learn more about dual circulation and China’s new economic plan read our paper here.

 

 

 


1Source: China National Bureau of Statistics (NBS) as at 04/01/2021.

2Source: Bloomberg, as at January 2021.

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