Yi Fuxian

Opinion | Is Chinese manufacturing set to follow the path of Japan’s decline?

The shrinking of the sector is both inevitable and irreversible. However, unfortunately for the US, it will not guarantee a domestic revival

Reading Time:4 minutes

Why you can trust SCMP

An employee works on an assembly line manufacturing GX6 cars at the Geely plant in Chengdu, Sichuan province, on April 13, 2023. Photo: Reuters

Yi Fuxian

Published: 2:30pm, 29 Aug 2024Updated: 4:43pm, 29 Aug 2024

Chinese overcapacity is raising concerns worldwide. It is easy to see why: China accounts for nearly one-third of the world’s manufacturing value added and one-fifth of global manufacturing exports. But there is good reason to believe that the decline of China’s manufacturing sector is imminent.

To understand what is happening now in China, it is worth recalling Japan’s recent history. After World War II, Japan’s manufacturing sector grew rapidly, thanks largely to access to the massive US market. But the 1985 Plaza Accord – which boosted the yen’s value and weakened Japanese exports – together with an ageing population and a shrinking labour force, reversed this trend.

From 1985 to 2022, the share of Japanese goods in US imports dropped from 22 per cent to 5 per cent, and Japan’s share of global manufacturing exports declined from 16 per cent to 4 per cent. Moreover, Japan’s share of global manufacturing value added fell sharply, from 22 per cent in 1992 to 5 per cent in 2022. The number of Japanese companies on the Fortune Global 500 list dropped from 149 in 1995 to just 41 today.

China has followed a similar upward trajectory in recent decades, but its manufacturing rise was even more dependent on the US market. Japan’s imports from the United States equalled 51 per cent of its exports to the US in 1978-84, compared to a 23 per cent per cent share for China in 2001-18.

Chinese family-planning policies are largely to blame for this imbalance. Typically, household disposable income would account for 60-70 per cent of a country’s GDP to sustain household consumption of around 60 per cent of GDP. In China, however, the one-child policy – which was in place from 1980 until 2015 – limited household earnings, encouraged high savings and constrained domestic demand.

As a result, Chinese household disposable income dropped to 44 per cent of GDP today, with household consumption falling from 53 per cent of GDP to 37 per cent of GDP. In Japan, by contrast, household consumption equals 56 per cent of GDP. One can look at it this way: if wages would normally amount to US$60-US$70, Chinese workers receive only US$44 and have just US$37 of spending power, whereas Japanese workers have US$56 of spending power.