MNI: High-Tech Import Bans A Supply-Chain Challenge For China

China’s supply chain faces growing restrictions on the import of high-technology components even as the manufacturing sector will continue to expand next year despite pandemic disruptions including the Omicron variant amid a ‘dynamic zero-Covid’ policy, advisors told MNI.

“China has already taken harshest anti-pandemic measures, and this should help to smoothen out possible interruptions to the supply chain by any new variant,” said Jiao Xinwang, president of China Manufacturing Think Tank. China has just reported its first Omicron case found in a traveler from overseas in the city of Tianjin on Monday.

China’s supply chain is resilient in self-repairing as it has established an independent and comprehensive industrial system that has withstood the initial Covid-19 outbreak back in 2020, said an advisor familiar with the publication of China’s official Purchasing Managers’ Index (PMI).

BRISK MANUFACTURING

China’s factory activity is expected to stabilise within expansion territory into next year, or above the breakeven fifty level between contraction and expansion, the advisor predicted, pointing to supply constraints easing overall for the economy outside of the key high-tech area in which trade import restrictions have proven to be a roadblock.

The official manufacturing PMI stood at 50.1 in November, a rebound after slowing for seven straight months as raw material costs fell along with an easing of power shortages into the winter season.

The advisor expects lower raw material costs of factory gate prices and power availability to continue into next year and buoy production.

But there is an imbalance in supply and demand in the domestic economy that is key for the government to address to prevent an economic slowdown in 2022. Exports, a key driver of the economy this year, may slow from a torrid pace, but there are some potential bright spots on trade.

"Port congestion and skyrocketing container and shipping costs may ease amid slower global demand," the advisor said, pointing to global manufacturing PMI trends.

Though the advisor noted that import-dependent commodities such as crude oil could surge in price and drive up domestic upstream prices, the government should continue with measures to safeguard energy and raw material supplies.

WEAKER LINKS

Jiao agreed that traditional manufacturing will remain robust, but the short link of the supply chain lies in reliance on overseas parts, materials, equipment, chips, and generic technology, which would limit the country’s upgrade to high-end manufacturing in the long run.

Manufacturing investment is the focus among top policymakers in recent years, as Beijing has decided to strengthen the real economy – meaning maintaining the proportion of manufacturing industry for the economy instead of leaning to the tertiary sector of the economy, said Jiao.

He added that such a strategy has been accelerating at the same time as a regulatory crackdown on the Internet, real estate, and finance sectors.

Learning from the German mittelstand manufacturing experience, China aims to focus on quality and innovation among small- to medium-sized (SME) firms, to strengthen the supply-chain weakness and make them a new economic backbone for Chinese exports, Jiao said.

China is implementing policies to promote SME upgrades to be “specialised, refined, characteristic and novel.”

A State Council executive meeting chaired by Premier Li Keqiang in mid-December confirmed more policies to help the manufacturing sector, including further tax and fee cuts and more research cost deductions, as well as more support for foreign firms setting up high-end production and research centers.

Another advisor close to the commerce ministry, who asked not to be named, suggested China should actively move to break a “technology blockade” led by the U.S., such as strengthening cooperation with G7, G20 countries and seek to remove related sanctions reciprocally.

The atmosphere of China-U.S. talks will play a key role in easing tech supply shocks, the advisor said, noting the working groups of both countries are in contact, see: MNI: China Lags On Purchase Commitments, But Tariff Hopes Rise.

“China will face similar thresholds in seek of joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),” the advisor said, “then why not agree with the U.S. first to show good will.”