The death of China sourcing

CHINA ADVISORY - Report 07 Feb 2023 by Andrew Collier

Global corporations are shifting their supply chains from China to other countries due to China’s Covid policies, rising state control, and concerns about deteriorating US-China relations. The top destinations are India and Vietnam. Much attention has been paid to the impact of the potential loss in the technology and semiconductor industries on China’s growth. However, If the supply chain shift is large enough among goods in general, it could have a significant impact on overall domestic Chinese employment and growth.

The question is how large an impact on China’s economy will there be due to a transfer of value chains to other countries? Foreign invested firms employ approximately 26 million workers, or 6.1 percent of urban employment of 424.6 million, and contribute to 9.7% of GDP. These numbers do not include employment among domestic exporting companies without foreign investment, which is most likely far higher. With shifting supply chains, job losses are likely to be concentrated in the financially weakest and most important part of China’s economy, SMEs, whose employment over 600 million is crucial for China’s economic and political growth and stability. They also will occur mainly in the exporting coastal provinces.

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