Wang Han is a director of the China Chief Economist Forum, chief economist of Industrial Securities, and vice president of the Institute of Economics and Finance
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Recently, the sentiment of the A-share market has gradually picked up, so in the communication with institutions, it is obvious that the focus of the market's concern has gradually shifted from short-term issues to medium- and long-term logic. Specifically, the first is the medium- and long-term driving force of China's economy, the second is the development prospect of artificial intelligence (AI) in China and the United States, and the third is the global reconstruction of the industrial chain and the so-called "overcapacity" problem, which are the problems that are often mentioned. In a sense, an investor's judgment on the current market as a "short-term rally" or a "medium-term bottom formation" largely depends on the perception of these issues.
For the above three issues, the author's view is relatively optimistic, to put it simply:
(1) The innovation of China's manufacturing has entered the stage of "surface" from the "point", which will be the biggest driving force for further economic transformation and upgrading in the medium term;
(2) The industrial application scenarios of artificial intelligence in China are far more abundant than those in other countries, which is the biggest difference with developed countries dominated by the service industry;
(3) The global restructuring of the industrial chain has more opportunities than challenges for China, and when the industry has "overcapacity", market forces will clear out inefficient enterprises, and most Chinese enterprises are obviously "high-efficiency" in the industry.
The above three conclusions are based on a common basis, that is, China is the world's largest industrial country and has the world's largest industrial chain. The author believes that the market may have overlooked the impact of this advantage.
Risk warning: domestic and foreign economic policy uncertainties, geopolitical risks, global economic and financial risks.
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1. The industrial added value ranks first in the world, and the industrial chain has huge advantages
At present, China is once again in the transition period of the old and new economic momentum, in the short term, due to the deceleration of the old kinetic energy, there is a certain drag on the economy, but also bring pessimism to the market, but the industrial system established in the past 70 years, for the long-term stability of China's economy has laid a solid foundation, laid the confidence for long-term development, mainly including the following three points:
China's industrial added value ranks first in the world. According to the World Bank, China's industrial value added (in US dollars) has surpassed that of the United States since 2011 to become the world's largest. From the perspective of global manufacturing distribution, East Asia has a clear scale advantage, while China's manufacturing added value accounts for 30.5% of the world's total, while North America is only 16.6%. Compared with the manufacturing industry of major countries, the proportion of GDP is as high as 27.6%, while Japan and South Korea are 20.8% and 25.5% respectively, and among the developed countries in the United States and Europe, Germany is 18.9%, the United States is 10.7%, France is 9.0%, and the United Kingdom is only 8.7%. (All 2021 data)
The industrial chain has greater advantages, and China's industrial output value is nearly three times that of the United States. Compared with the industrial added value, the industrial output value can better reflect the scale advantage of the industrial chain. According to 2022 data, the United States accounts for only 11.7% of global industrial output, while China is as high as 32.3%, nearly three times that of the United States. This data means that the intermediate input sector of China's manufactured goods relies more on domestic completion, and the industrial chain is complete. In 2019, Guangming Daily published an article that "after 70 years of development, the mainland now has 41 categories, 207 medium categories, and 666 sub-categories, forming an independent and complete modern industrial system, and is the only country in the world that has all the industrial categories in the United Nations Industrial Classification." ”
The heavy industry base has enabled China to avoid repeating the "middle-income trap" of many countries. The middle-income trap is a concept proposed in a 2007 World Bank report, with Argentina, Brazil, South Africa and others being the representative countries. However, there are essential differences between China and Argentina, Brazil and South Africa. First of all, China's industrial development path and focus are different. In a previous article "The Key to Breaking the Real Estate Situation is Outside Real Estate", the author wrote: "In the early days of the founding of the People's Republic of China, the priority development of heavy industry was the foundation of the current integrity of China's industrial system. "Although the development of heavy industry in the early stage is difficult, it provides a better environment for the development of comparative advantage industries in the later stage. Economies such as Argentina, Brazil and South Africa have taken the lead in developing industries with comparative advantages, and the lack of heavy industry base has made the later development of industries with comparative advantages also face a ceiling. Second, Argentina, Brazil, and South Africa have perennially had a national savings rate (total savings as a percentage of gross national income) below 20 percent, while China reached 36 percent in 1990. These countries do not have sufficient capital accumulation, and heavy industry is a capital-intensive industry, so it lacks a basis for the development of heavy industry. Since China entered the upper-middle-income economy in 2010, China's per capita gross national income has reached US$12,850 in 2022, just one step away from the World Bank's latest high-income economy threshold of US$13,845.
2. A complete industrial system enables enterprises to innovate and upgrade "from point to surface"
China's industrial system provides a foundation for the development of new productive forces that is difficult for other countries to match. The self-sufficiency rate of China's manufacturing supply chain is significantly higher than that of other major economies (see table below). For innovative young people, China's well-established industrial system means that there is no need to repeat the "wheel" when putting innovative ideas into practice, and China's strong industrial supply chain can quickly support them to implement "new ideas". For example, if a mobile phone manufacturer wants to build a car, the most important thing is its idea and ability to integrate resources, and China's supply chain can provide most of the parts, so it can be produced quickly. This is an advantage that is difficult for other economies to match.
Over the past few years, China's well-established industrial system has helped to support innovation. According to the World Intellectual Property Organization, China ranked 12th out of 132 economies in the Global Innovation Index (GII) in 2023. Relative to the stage of economic development, China's innovation performance is excellent. The Economic Innovation Index (GII), which is similar to Chinese's GDP per capita (adjusted for PPP), is around 30, but China is above 50. Moreover, China's input-output in innovation is relatively high, ranking 25th in China's innovation input index, but 8th in the output index.
3. Artificial intelligence is easy to find industrial application scenarios in China
Technological developments in the field of artificial intelligence are changing rapidly. After ChatGPT was released by OpenAI in November 2022, due to its breakthrough in artificial intelligence (AI) technology - realizing high-quality text interaction with people, artificial intelligence technology has become a hot spot in the world and a new area of attention in the capital market. In February 2024, OpenAI released another AI model, Sora, an AI model that can be used to produce videos by inputting text, taking AI technology one step further.
But the development of AI in the United States seems to be in its infancy. With the rapid development of artificial intelligence technology, AI has been applied to varying degrees in all aspects of society. However, in the U.S. market, where AI is generally considered to be growing rapidly, the overall adoption rate of AI technology by U.S. companies is still low, or still in the process of development. According to the Business Trends and Outlook Survey released on the U.S. Census Bureau's website in May 2024, only 5.0% of companies currently report that their goods and services have already used AI, and only 6.5% plan to use AI in the next six months. In terms of industries, information industry, professional services, and education services are the top three industries with the highest degree of AI application, among which the proportion of AI use in the information industry is as high as 18.1%, while the proportion of AI use in real estate, corporate management, finance and insurance, arts and entertainment, health care, and social assistance is also higher than or equal to the average. In contrast, the adoption of AI in some industries is relatively low, with only 2.8% of enterprises in the manufacturing industry using AI, and there are almost no AI use cases in utilities. Overall, the current high proportion of AI use in the U.S. is mainly concentrated in industries that rely heavily on data analysis, automated decision-making, and text, image, and sound processing—or in service industries, while the penetration rate of AI in manufacturing is still at a very low level.
The structure of the economy is such that the application scenarios of AI in the U.S. economy are mainly limited to the service industry. The development of any emerging industry requires continuous investment, and new investment also needs to be paid by industry. From the perspective of the United States, 71.7% of the GDP of the United States in 2023 will be in the private service sector, and if the government sector is considered, more than 80% will be in the non-primary and secondary industries. In the secondary industry, the added value of manufacturing accounted for only 10.3% of GDP. Within the service sector, average hourly wages are higher in utilities, information, finance, and professional services. From the perspective of the scale of the service industry and the cost of labor, it is not difficult to understand why the penetration rate of AI is higher in some service industries in the United States. However, relatively speaking, due to the relatively low proportion of industry, the United States lacks the application scenarios of artificial intelligence in industrial manufacturing. In addition, since the U.S. service sector accounts for about 86% of non-farm payrolls, the application of artificial intelligence will inevitably have an impact on this part of the workforce, which in turn may lead to potential social problems.
China's industrial system provides industrial application scenarios for artificial intelligence and new technologies. From China's perspective, although AI is currently widely used in the financial, retail and high-tech industries, as the world's largest industrial country, its strong industrial base may make China's AI application in the manufacturing sector have broader prospects and more possibilities. As early as 2022, McKinsey's AI team QuantumBlack pointed out that "AI is in the market entry stage in China and is expected to have a huge impact by 2030." A range of AI could create more than $600 billion in economic value annually, and will be concentrated in areas such as automotive transportation and logistics, manufacturing, and enterprise software." Since industry is a capital-intensive industry, the application of AI in this field is more about "enable" rather than "replace" labor, so the social cost of AI development in China will be lower than that of the service industry.
The abundance of industrial application scenarios also provides a foundation for China's transcendence in the field of artificial intelligence. At present, AI technology is still in the process of continuous development. Compared with the fields of text and film and television creation, the industrial field has high requirements for the repetitive error rate of the system after multiple runs. In this sense, there is still uncertainty about whether the current popular generative large models can match the requirements of the industry. China's vast industrial system provides a wealth of application scenarios for the "trial and error" of different types of AI technologies, which is also an advantage that other countries do not have.
Fourth, the restructuring of the global industrial chain has more opportunities than challenges for Chinese enterprises
In the past few years, the restructuring of the global industrial chain has accelerated, and Chinese enterprises have also increased their investment abroad. In the face of the relocation of some domestic industries, there are also some concerns about whether China will face "industrial hollowing". However, the author believes that the current process of restructuring the global industrial chain is not completely negative for China.
First of all, there are still a large number of people in the world who have the need for industrialization, which provides a demand base for China's industrial system to "go global". At the end of 2022, the global population was about 8 billion people. Previously, the export demand of Chinese companies mainly came from Western countries. However, in terms of population size, the developed countries of the West have about 1.06 billion people, and their economies have been growing at a low rate in recent years, and the process of industrialization is nearing its end. Emerging economies other than China have a population of nearly 5.5 billion and generally have the need and potential for industrialization. The "cheap and high-quality" of China's industrial products is highly compatible with the industrialization needs of emerging economies. As the Belt and Road Initiative continues to advance, demand from emerging markets cannot be ignored.
Second, many of China's industrial enterprises already have global competitive advantages, and in the process of "going global", they are expected to further enhance their global influence. According to the survey data released by AmCham China in the China Business Environment Survey 2024, 24% of the member companies surveyed believe that "increasing competition from Chinese private enterprises" is a business challenge for doing business in China, which also reflects that a significant number of Chinese companies have become highly efficient. When the industry is "overcapacity", market forces will clear out inefficient enterprises, and as Chinese companies with efficiency advantages, they are more faced with opportunities than challenges in the process.
Third, the market's concern about the "hollowing out" of the industry may be overdone. Since the relocation of Japanese industries in the 1980s and 90s had a clear adverse impact on its economy, there seems to be a stereotype in the market that "the relocation of industries to Japan means the decline of manufacturing". Historically, however, this has not been the case, as in the case of the United States, its foreign direct investment accelerated significantly in the 90s, but during the same period, the expansion of manufacturing capacity in the United States was the fastest since the oil crisis, with a compound annual growth rate of 4.6%, more than double the 2.2% in the 80s. Moreover, there are several essential differences between the current China and the Japan of the past. First, the market size. At present, China has a population of 1.4 billion, but Japan has a population of about 120 million. Japan's macroeconomic and industrial policies are relatively unindependent. The third is the industrial volume. At the peak of the 80s and 90s, Japan's manufacturing added value accounted for about 20% of the world's total, and exports accounted for 8.9% of the world's total, while China's current value added value accounted for 30.5% and 14.4% respectively; Fourth, compared with Western countries, China has more experience in mobilizing resources for the government to "do big things".
It should be pointed out that the concept of "industrial transfer" itself is neutral, and it is a common economic phenomenon in the process of economic development, and behind it is essentially Ricardo's theory of comparative advantage. After past development, the increase in Chinese's per capita income has given some low value-added industries the motivation to move outward, taking advantage of the low labor cost of some overseas developing countries, which is in line with the law of the market and the demand of the global South economies to "seek development". As the largest manufacturing country, China practices true multilateralism, promotes the further deepening of the Belt and Road Initiative, strengthens economic communication with other countries in the Global South, and actively seeks the common development of countries in the Global South, which is obviously beneficial to the collective rise of emerging market countries and developing countries, as well as China's own development.
Risk warning: geopolitical risks, global economic policy uncertainties, global economic and financial risks.