The China Manufacturing Gravity Well

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Subscribe nowThe ageing reflexChina’s manufacturing success is creating gravitational forces that are reshaping the development paths available to EM economies. In this note, I’ll unpack what that means.Earlier in my career, there was a safe reflex toward China. Watch lending data, keep an ear to the ground on policy, and on any sign of an acceleration in China, buy EM assets. We all understood the transmission mechanism well. Chinese growth upswings were driven by property and infrastructure booms, which pulled in commodities, machinery and other capital goods. As a result, much of the emerging world experienced a boost to demand. Time it right, and you had a career.Some years ago, that relationship weakened. After the property downturn, the way that growth connects to the rest of EM has changed. The new pattern is less supportive, with China sustaining activity more through manufacturing scale, and the adjustment being pushed outward through surplus supply and tougher competition in tradable goods.This is well reported, but mostly as a developed-market problem. We’re familiar with the arguments about tariffs, ultra-competitive electric vehicles and solar, and how they shape industrial policy in Europe and the United States. As an EM investor I want to discuss what it means for the countries in the middle. Many EM economies do not have the market size, fiscal capacity or policy room to respond effectively.The harsh truth is that China’s success has changed the opportunity set for others. Manufacturing was the most common route through which earlier Asian economies escaped …