UBS: China Faces GDP Shave from Tech Decoupling
UBS believes China faces a daunting challenge of handling a technology supply chain decoupling that threatens to cut annual growth by 0.5 percent in the coming years.
Although its manufacturing investment could take a hit in the short-term, UBS believes the ongoing supply chain disruptions will be manageable for China particularly with regards to impact to employment and other investments. But over the long-term, the bank believes the tech supply chain decoupling «is most worrisome» due to reliance on imported components and capital goods from the U.S. and other developed markets.
«If forced to decouple, China will build its own ecosystem and substitutes eventually. But with less access to advanced technology and high tech equipment, China's advance in the coming years may be slower – productivity gains will be slower, and potential GDP growth may be weaker,» the bank said in a recent report.
«Decoupling, especially in technology, may lower China's potential growth by 0.5ppts a year in the coming years. There is a lot of uncertainty here, depending on China's own policies and innovation, but also on whether and to what extent U.S. allies join the effort,» the report said.
Low Exporter Confidence
Currently, exporters worldwide with supply chain exposure in China are increasingly considering options elsewhere. The UBS report includes surveys of chief financial officers (CFO) from export-oriented companies worldwide that expressed similar sentiments that were intensified by the coronavirus pandemic.
Some 76 percent of respondents in the U.S. CFO survey plan or continue to move away from China, with 60 percent of China respondents claiming the same. Within the North Asia region, the figures spikes to 85 percent, with 44 percent naming Covid-19 as an additional push factor.
«These findings may suggest a significant exit of foreign companies from China, or Chinese exporters rushing to move elsewhere,» said the report, adding that the exodus could be further fuelled by supply chain disruptions including the country’s national shutdown.
China Stagnation
In addition to slowing global growth, the bank underlined China’s stagnating share of global trade in the past few years as evidence of broader macro implications.
«Both [foreign direct investment] into China and China's outward direct investment also dropped since 2015, suggesting a slower integration into the world economy,» the report said.
«Notably China's integration with the global economy deepened further after the [global financial crisis], with its export and investment flows rose further until 2016. In the past few years, the slowdown and adjustment in China's economy, U.S.-China trade war and increased geopolitical risks and uncertainty have likely contributed to the stagnation.»
Ongoing Shifts
Macro aside, the bank believes that the supply chain itself has also been undergoing ongoing disruption as China’s labor and environmental costs increased in the last decade. UBS underlines signs of such intentions from its China CFO survey as early as 2018 before trade war uncertainties took over.
Other drivers include Chinese policies to address imbalances (increase minimum wages and social welfare, energy subsidy cuts and tightened environmental rules), its ongoing rise in the value chain and increased Southeast Asia demand.
And outflows aside, there are also signs of increased demand from other sources including Europe and especially its companies based in China that also serve the China market. For example, 89% of 626 respondents from the European Chamber of Commerce in China – mostly from such «in China, for China» companies – remained committed to investing in the country.
