What does ‘the great fall of China’ mean for British industry?

The Engineer

It’s been described by some as the “Great Fall of China”. And although that may be a somewhat over-dramatic description of the problems currently facing the world’s second largest economy, concern is growing over what the country’s financial turmoil might mean for the rest of the world.

It’s impossible to predict how the current situation will play out. And although we shouldn’t underestimate its seriousness, neither should we be that surprised.

A slowdown in China’s economic growth (and it’s worth noting that despite the apocalyptic headlines it is still growing at estimated 5%) was always inevitable. Basic economics dictate that the bigger an economy gets the harder it is to sustain rapid growth. Add to this a marked decline in China’s working age population and you have the recipe for a slowdown.  

Given the interconnectedness of our global economy, the current crisis will have a global impact. China is a major importer of a range of commodities, and an increasingly important export market for manufacturers all over the world, including here in the UK. Indeed, a number of British manufacturers have been reporting a slowdown in Chinese trading conditions for some time now. It’s a sobering reminder that exporters should avoid becoming overly dependent on one economy.

However, though any decline in China could hit UK manufacturing in the short term, the longer-term impacts may not be so unwelcome.

Whilst the UK has spent the last few years talking up the virtues of rebalancing the economy back towards manufacturing, China has been heading in the opposite direction, and rebalancing it’s economy away from manufacturing (where growth is shrinking at it fastest rate in 6 years) and towards services. One reading of the current situation is that its status as workshop of the world could be on the wane. Surely no bad thing for UK manufacturers looking to compete on a world stage.

This situation is compounded by rising Chinese wage demands, and an increasingly level global playing field created by automation technology. Against this backdrop, the benefits to overseas firms of establishing a manufacturing base in China have become less pronounced. And in many cases, it is becoming increasingly attractive to keep or return manufacturing to the UK, a phenomenon that is already creating extra jobs and boosting GDP.

The current slowdown has also drawn attention to notable frailties in the Chinese financial system which is dominated by state owned banks lending to large state owned enterprises. This high degree of state control has helped fuelled runaway growth in the good times, but hasn’t necessarily encouraged and stimulated the kind of smaller, innovative firms that are frequently at the heart of technological progress. Again, this situation should play to one of the UK’s key strengths: a diverse range of nimble technology firms and an economic system increasingly geared around helping them find a route to market.

The nightmare scenario – a full blown political and economic crisis in China – would have dire consequences around the world. But most observers believe that this is unlikely given the high levels of state control. There will be global fallout from the current downturn. But – if we focus on our strengths – China’s industrial decline need not be a disaster for UK manufacturing.