Is China losing competitiveness or moving up value chain?

IV. Is China moving up the value chain?

Is China simply no longer competitive and doomed as the manufacturing power house? Of course not. As we have shown earlier, Chinese exports have continued to outpace global trade, albeit the difference has narrowed substantially. For the time being, there is simply no other country that has the size and complexity of Chinese manufacturing production at the relatively lower end of the market.

There are also signs that China as a whole and many industries in particular are moving up the value chain as labour cost rose and the currency appreciated.

First, processing exports as a share of total has steadily declined while ordinary exports, which relies on more than just cheap labour, has gained ground (Figure 15). As ordinary exports have a higher domestic value-added content, this shift also means that domestic value-added in China's overall exports have increased.

Second, the country has turned from a net importer of machinery and equipment into a net exporter in the past half a decade (Figure 16). Indeed, China's market share of non-transport machinery and equipment exports in the US and EU markets has quadrupled since 2002, though the pace slowed in recent years (Figure 17). Moreover, in terms of its largest exports, the electronics products, China's market share in the US and EU has trebled in the past decade and continued to gain grounds from the already formidable level (Figure 18).

Third, Chinese exports of automobiles have grown rapidly and profit margins in traditional sectors such as textiles have improved (Figure 19&20). China's loss of market share in automobile related products in the developed economies in recent years has been seen as a strong evidence of its loss of competitiveness. However, Chinese exports of motor vehicles have continued to grow while Chinese production in the fastest growing and by now largest automobile market, the Chinese market, has remained strong. It seems that while the US and Europe have increasingly sourced their auto parts from closer by places like Mexico and Eastern Europe, China increased exports to non-traditional markets such as developing countries.