Market Insight

How Will a Mini-Stimulus Campaign Affect Machinery Production in China?

May 15, 2014


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Machinery production in China is forecast this year to expand 7.8 percent to $475 billion, a slight slowdown from 7.9 percent growth in 2013, according to the quarterly tracker for Chinese Machinery Production from IHS Technology (NYSE: IHS).

During the first three months of the year, China’s real gross domestic product (GDP) expanded by 7.4 percent from the same period a year earlier, less than the 7.7 percent growth in the fourth quarter of 2013. This indicates that China’s economy continued to soften in early 2014  as it reflected weakening domestic and external demand.

At a result, Chinese machinery production growth is decelerating, increasing by 3.6 percent annually in the first quarter of 2014, down from 9.9 percent in the fourth quarter of 2013.

“Since 2012 many industries in China—including construction machinery, machine tools and metalworking—had suffered overcapacity,” said Jay Tang, industrial automation analyst at IHS. “While this continues to impact market growth, the Chinese government is also engaging in a series of efforts that amount to a ‘mini-stimulus.’  These efforts are beginning to show signs of working, but it will take some time for stronger results to come.”

Although this situation continued in 2013, most industries are recovering, as presented in the attached figure.

The information in this release is from the Machinery Production Market Tracker – China – Q1 2014 report, taken from the Industrial, Medical & Security Technology service of  IHS.

Among the industries serving domestic consumption in China that grew in 2013 were agricultural machinery; elevators and escalators; electronics and electronics assembly; oil and gas; medical and scientific; food, beverage and tobacco machinery; and packaging machinery. But because of weak investments overall in 2013, most heavy industries, including mining machinery and cranes and hoists, declined. One exception to the general downshift in heavy industries was the wind turbine sector, which rebounded strongly because of increasing grid-connected power from wind turbines.

Now China’s leaders are issuing increasingly clear signals that they plan another round of economic stimulus programs, as evidence accumulates that the economy is slowing more than expected this year. Taking lessons from the massive stimulus policies in 2009, this new round of economic stimulus programs is likely to be much smaller than in 2009.

According to a statement from the State Council of China, these stimulus programs so far consist of an extension for one more year, through 2016, of several stimuli.

The first stimulus is an existing exemption from business taxes for the first 60,000 RMB (approximately $9,740) of the profits of small businesses. The second aspect is a plan to open 6,600 kilometers (4,100 miles) of new rail lines this year, an increase of 1,000 kilometers from last year. The third stimulus is a plan to build or renovate homes for 4.7 million people living in makeshift shelters.

The government’s new measure is described as the beginning of a series, making up a mini-stimulus of sorts.

Given a confluence of significant demand withdrawal and structural reforms, China’s economic growth will be restrained during the medium term. But a key issue for the government, as it balances structural reform and growth preservation, is whether China still needs high growth to absorb excess labor. Based on the number of citizens turning age 18 and the increase in urban population, China will be dealing with more than 10 million more excess laborers per year during the next five years, only moderately fewer than in the last decade.

As a result, the government is still under considerable pressure to create jobs. IHS estimates that a real GDP growth of 7.0 percent will generate about 13 million new jobs, which approximates the size of the projected excess labor.

Continuous mini-stimulus measures will be the main theme for the Chinese economy this year.

Greater fine-tuning measures directed at specific industries will require automation suppliers, in particular, to pay more attention to the situation in each industry, as the effect of the mini-stimulus will be different.

Leading this year in the growth of Chinese machine production are oil and gas equipment, robotics, packaging machinery, wind turbines, and agricultural machinery. In contrast, mining machinery, construction machinery, and metalworking machinery will still struggle with overcapacity this year, and production of these categories will continue to fall.   

Geography
China
Research by Market
Manufacturing Technology
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