The logic behind high investment growth in some manufacturing industries

Financial Times: So what industries are supporting the outpacing growth in manufacturing so far this year?

Bian Spring Water: From the perspective of manufacturing investment structure, the proportion of midstream equipment manufacturing industry has increased significantly in recent years, and the investment in upstream raw materials and downstream consumer goods manufacturing industry has shrunk. From January to April 2024, the growth of manufacturing investment was mainly contributed by the midstream equipment manufacturing industry, of which the cumulative growth rate of electrical machinery, computer communication electronics, special equipment and general equipment was 10.1%, 13.1%, 13.9% and 13.2%, respectively, which was higher than the overall level of the manufacturing industry. Considering that midstream equipment accounts for nearly 50% of manufacturing investment, the high growth of investment in the above industries will support manufacturing investment.

REF615 Financial Times: What are the driving factors for the high growth of investment in these sectors?

Bian spring water: The first is the structural recovery of demand. For manufacturing investment, the impact of demand changes on investment intention is more important, and it is the most important trigger condition for manufacturing investment recovery. Combined with the 2020 input-output table, we divide manufacturing demand into intermediate demand and final demand, while final demand can be divided into consumption, capital formation, and exports.

First, consumption drive: the transformation of consumption paradigm strengthens the demand for cost reduction and efficiency increase. The cost reduction pressure of the food and beverage industry chain has increased, forcing restaurant companies to layout to the manufacturing end. The report “China Food and Beverage Consumption Trends 2023” shows that consumers in the catering industry have the ultimate pursuit of high cost performance. In the face of multi-dimensional competitive pressure, the demand for cost reduction and efficiency improvement of the catering industry continues to strengthen, forcing the continuous integration and accelerated development of the catering supply chain, driving the growth of investment in the upstream food manufacturing industry, and the year-on-year growth rate of investment in the food manufacturing industry reached 27.8% from January to April 2024.

Second, export-driven: the recovery of external demand and the resonance of the inventory cycle support export-oriented industries to expand capital expenditure. For example, electrical machinery is the second largest contributor to manufacturing investment, accounting for about 10.2% in 2023. From the input-output table, external demand is the main factor affecting the electrical machinery manufacturing industry. Since 2021, the export delivery value and operating income of the electrical machinery manufacturing industry have maintained rapid growth, which has driven the fixed asset investment of the electrical machinery manufacturing industry to maintain high growth.

REF615 Third, driven by capital formation: the midstream equipment manufacturing industry benefits from policy support to maintain rapid growth. In recent years, policies have continued to increase support for the manufacturing industry, and manufacturing investment has maintained rapid growth since 2021, driving the demand for midstream equipment manufacturing industry to improve. From an expected point of view, China will implement a new round of large-scale equipment renewal this year to support the continued growth of investment in the midstream equipment manufacturing industry.

The second is profitability repair. Generally, the improvement of industrial profits leads manufacturing investment growth by about 12 months, but some industries have a longer fixed asset investment cycle, and it may take longer for earnings to repair leading investment. In the first quarter of 2023, the profit of the manufacturing industry fell by 29.4% year-on-year, but the profit of the midstream equipment manufacturing industry such as transportation equipment, electrical machinery and general equipment was better, and the fixed asset investment in the above industries maintained rapid growth in the first quarter of 2024.

Finally, policy support. The improvement of financing conditions for manufacturing, especially high-tech manufacturing, is also the basis for this round of manufacturing investment recovery. Since the 2020 Government Work Report proposed to “substantially increase medium and long-term loans to the manufacturing industry”, the balance of medium and long-term loans to the manufacturing industry has maintained rapid growth. Since 2022, the central and local governments have introduced a series of fiscal, tax, financial and industrial policies to promote the transformation and upgrading of the manufacturing industry. Driven by policies, investment in the high-tech chain of the midstream equipment manufacturing industry has grown rapidly, while driving demand growth in the upstream non-ferrous industry.

Financial Times: Please talk about your outlook for manufacturing investment in 2024.

Bian spring water: It is expected that driven by overseas replenishment demand, the annual profit of traditional foreign trade industries such as home appliances, machinery, electronics, textile and apparel, which benefit from improved external demand, is still supported, and correspondingly its fixed asset investment is also expected to maintain a high growth rate. We expect manufacturing investment growth to reach 8% for the full year under a neutral assumption, higher than 2023. If overseas restocking demand is strong and geopolitical disturbances are weaker than expected, the annual growth rate is expected to exceed 10%.