Will Made in China 2025 reshape the global economy?
- China’s supercycle is winding down with the old growth drivers—export and investments— slowing, debt remaining disconcertingly high; the work force having peaked; and US-China trade frictions intensifying.
- China aspires to reshape its economy through Made in China 2025—a 10-year plan—to usher in the fourth industrial revolution and secure dominance in global technology while expanding its global influence via the Belt and Road Initiative.
- China is well-placed to achieve self-sufficiency if not world leadership in tech, telecommunications, AI, Fintech, internet, NEVs, high-speed rail, and clean energy by 2030.
- But as the rise in US-China trade frictions indicate, these aspirations will be challenged if they continue to be implemented through extant industrial policies and controls on market access.
What are the global implications of a slowdown in China’s growth?
- Made in China 2025 does not make China’s inexorable rise inevitable as deleveraging and public sector restructuring are needed to keep China from slowing below 4.5% over the next decade.
- China’s high debt level remains its Achilles heel, requiring both financial-sector and SOE restructuring, with the risk that policy mistakes could trigger a “man-made financial crisis.”
- China's medium-term growth could slow by 2%-points to 4.5% by the end of the next decade, reducing global growth by 0.4%-points, with a risk that base metals prices fall 40% to 60% from current levels.
How will the reshaping of US-China strategic relations impact the world?
- Markets are focused on the risk for a “great power competition” between the US and China with implications for technology leadership, supply chain and end product makers reorganizing along security alliances.
- Cybersecurity is the new frontier with a persistent state of conflict due to the lack of effective deterrence structures. We think both sides will seek self-sufficiency rather than global domination in technology, but China’s large internet players may take global leadership in AI.
- China is rising to global leadership in clean energy across autos, solar and wind power, and green bonds.
- US-China tensions can potentially trigger the existing manufacturing supply chain to permanently shift out of China to ASEAN countries and others.
How quickly will China open its financial markets?
- The global reach of China’s financial markets and currency will proceed gradually even as China enters mainstream equity and fixed income indices.
- Successful execution of the Made in China 2025 agenda likely makes MSCI China a structural overweight, though without corresponding strength in the currency.