China to play dominant role in global supply chain as it transitions to complex, high-end products, says HKMA’s Eddie Yue

China’s role in the global supply chain will become even more crucial in the coming years, as it garners a bigger market share in intermediate products required for manufacturing globally, according to Hong Kong’s top banker.

Despite ongoing geopolitical tensions that have fuelled calls for companies to reduce their dependence on China, cutting China off from the value chain is unlikely because of the complexity and interconnectedness of the global supply chains of many industries, such as information technology and automobile, said Eddie Yue Wai-man, CEO of the Hong Kong Monetary Authority (HKMA).

“Coupled with the capital-intensive nature of these industries, and the fact that most economies in Asia are unlikely to have the necessary scale and capacity to host these complex and large-scale supply chains, it would be difficult for any wholesale relocation of these more sophisticated supply chain networks,” Yue told the Bund Summit in Shanghai on Friday.

“China still has a lot of potential. Based on our previous experience, we think a country’s export can grow in tandem with its domestic consumption capacity, and China is clearly moving in this direction.”

HKMA CEO Eddie Yue says China cannot be cut off from the global value chain because of its complexity and interconnectedness. Photo: Xiaomei Chen

This is happening at the same time as China is transitioning from being a global supplier of simple products, to producing something more complicated, he added.

The global supply chain was roiled for nearly three years because of China’s strict pandemic controls. Some big companies like Foxconn, a major Apple supplier, struggled to keep with production because pandemic-related issues. Since then, the Taiwanese firm has moved some of its iPhone output to India and is seeking to diversify production further. Even smaller manufacturers of footwear, apparel and toy manufacturers are increasingly looking to countries in Southeast Asia to cut their reliance on China.

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Last month, China’s exports declined 14.5 per cent year on year, but it still remains the world’s biggest supplier of a wide variety of goods, ranging from electrical machinery and equipment to consumer electronics. The country is also a major player in electric vehicles, with shipments expected to reach 1.3 million units this year.

Still, economies in Asia need to brace themselves for long-lasting changes in global supply chains ushered in by the Covid-19 pandemic and geopolitical headwinds, Yue said, estimating that the total number of global value chain network linkages dropped by some 30 per cent between February 2020 and the end of 2021.

Yue stressed the importance of trade diversification as a hedge against risk of deglobalisation.

“Trade diversification to regions with high growth potential, such as Africa and the Middle East is important,” he said. “By connecting with more economies, Asia can help sustain globalisation.”

Trade in services is another promising area for diversification, Yue said. “The relatively low levels of trade openness in services regionally and the burgeoning digital economy offers exciting opportunities to export a wide range of digitally-deliverable services. ”

Yue called for stronger regional collaboration in the development of regional supply chains and cross-border payments, as these collaborations will allow economies across regions to grow more sustainably.

“An increasing number of economies, including those in Asean, want to use the renminbi to settle their trade with China,” he said. “To facilitate this, the cross-border payments infrastructure needs to become more efficient to keep up with demand.”

The Bund Summit, organised by the China Finance 40 Forum, is a non-government conference that brings together senior policymakers, financial executives and academics.

Robert Rubin, the former US treasury secretary, Shang Fulin and Xiao Gang, former chairmen of the China Securities Regulatory Commission, were some of the notable participants.

South China Morning Post