Mainland China’s new Five-Year Plan set a goal of keeping the manufacturing sector’s share of the economy stable. This contrasts with the previous plan, which emphasised increasing the share of the services sector. Putting industrialisation back on track should lift labour productivity growth.

As the country’s economic base moved from agricultural to industry, workers gained skills. In 1978, industry accounted for 50 per cent of national output but less than 20 per cent of jobs; farming accounted for 30 per cent of output but 70 per cent of employment. The excess rural labour was attracted by higher wages in urban manufacturing jobs, helping them to learn new skills, and boosted overall productivity.

Higher wages in towns boosted savings, enabling investment in capital-intensive industries, but also allowed workers to buy the goods they made.

However, in recent years, as weak global demand hit manufacturing, Beijing looked to services for growth and as a cushion for the labour market. Some 7.6 million workers entered the industrial sector in 2010, but an average of 3.5 million a year are now leaving while services employment has risen by 11.5 million a year.

But as low-productivity service sectors such as retail and hospitality overtook manufacturing as the main job creator, labour productivity growth slowed – from an average of 18.7 per cent a year in 2003-07 to just 6.1 per cent in 2015-19.

Although most developed economies industrialise and then de-industrialise, most do not begin deindustrialisation until reaching more than 40 per cent of US labour productivity. Mainland China’s figure is only 16 per cent, and just 32 per cent of Korea’s level.

There is thus still substantial room for industrialisation in mainland China. And while its urbanisation rate has risen to 60 per cent from under 20 per cent in 1978, most developed countries’ rates are over 80 per cent.

Although the urban population has grown by 660 million over 40 years, migrant workers are now choosing services jobs rather than manufacturing – and joining low valued-added services sectors, instead of high valued-added jobs in software, technology development or financial services. These lower-skilled services jobs are less productive on average than manufacturing jobs, dampening potential growth.

Increasing technology levels by deepening integration in global supply chains has helped mainland China to upgrade its manufacturing capabilities and lift labour productivity. Since joining the World Trade Organization in 2001, the country’s share of global exports has risen from under 5 per cent to 13 per cent. Manufacturers have moved up the value chain with the share of electrical machinery exports rising while lower value-added exports such as textiles decreased.

The policy shift to keeping the manufacturing share stable signals that industrialisation will continue to play a key role in mainland China’s long-term growth. Indeed, re-industrialisation is needed for it to tap into its full growth potential.

We expect Beijing’s support for the manufacturing sector’s growth to include:

  • Making it easier for migrant workers to move to cities by relaxing household registration restrictions and reforming rural land rights
  • Boosting domestic demand to hedge against uncertainties in global growth.
  • Tax cuts and fee reductions to support manufacturing investment.
  • Further market reform to encourage fairer allocation of resources.
  • Investing in education and skills.
  • Encouraging industrial innovation.
  • Integrating frontier technologies with traditional ones.
  • Further increasing global trade and investment links.

First published 17 November 2020.

Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).

Disclosure and disclaimer

More, collapsed
Join the conversation?

Join our Linkedin group to get an unparalleled view of macro and microeconomic events and trends from a bank that is a leader in both developed and emerging markets.