Changes in China forcing supply-chain rethink: ADB

China is unlikely to return to its heyday of double-digit expansion and will increasingly have to look for new sources of growth, says ADB chief economist Shang-Jin Wei.
China is unlikely to return to its heyday of double-digit expansion and will increasingly have to look for new sources of growth, says ADB chief economist Shang-Jin Wei.PHOTO: LKY SCHOOL OF PUBLIC POLICY

Low-cost manufacturing shifting to countries such as Vietnam, Bangladesh and Myanmar

China's structural transformation is not only weighing on trade and growth in the region but also forcing companies to rethink their supply chains, according to the Asian Development Bank (ADB).

Low-cost manufacturing is shifting out of China into countries such as Vietnam, Bangladesh and Myanmar.

Firms from Singapore, Japan, Taiwan and South Korea, which have traditionally relied on low-cost production in China, have had to adjust, noted the report out yesterday.

Those that manage this well will maintain their dominance at the "upstream" portion of the regional value chain, said ADB chief economist Shang-Jin Wei.

Its Asian Economic Integration Report 2015 examines trends in trade, finance, migration, foreign direct investment and other economic activity in the region.

The report found that trade in Asia has slowed faster than world trade in recent years - the region's trade expansion has been coming in below gross domestic product growth since 2012.

Since the global financial crisis, regional trade has also gone up less for each percentage point rise in economic growth compared with the period before the crisis.

There are a few reasons for this, said Dr Wei, who is also a professor of finance and economics at Columbia University's Graduate School of Business.

First, Asian economies, in particular China, are rebalancing away from exports and investment towards consumption and services.

Moderating growth in China, whose role in regional trade is becoming increasingly important, has also weighed on exports across the region, he noted.

The region's trade with China made up just 5 per cent of intra- Asian trade in 1990, a share that rose to more than 20 per cent last year.

China's imports from Asia exceeded US$800 billion in 2011 but have stabilised since, amid tepid global growth.

Dr Wei said China is unlikely to return to its heyday of double- digit expansion and will increasingly have to look for new sources of growth.

Restrictive population policies have resulted in fewer young Chinese workers entering the labour force, even as the country ages. Wages have also risen alongside living standards, which means China can no longer rely on cheap labour to expand, he noted.

"China has to look for new ways to grow... (which are) intrinsically more difficult to generate."

Yesterday's report also included a study of Special Economic Zones in the region.

It found that governance gaps and a lack of focus undermined performance in some zones, while successful zones managed to build close ties with the domestic economy and diversified away from assembling imported inputs.

A version of this article appeared in the print edition of The Straits Times on December 09, 2015, with the headline 'Changes in China forcing supply-chain rethink: ADB'. Print Edition | Subscribe