Asian Frontiers Picking Up China's Low-End Manufacturing, Says Fitch

KUALA LUMPUR, Oct 3 (Bernama) -- China's move up the value chain and relocation of low-end manufacturing to cheaper countries, will continue to create opportunities and support strong economic growth in some of Asia's "frontier" emerging markets, says Fitch Ratings. The countries best-placed to take advantage over the next few decades will be those offering workable business environments and relative macroeconomic and political stability to complement low wages, strong demographics and geographical advantages, it said in a statement here Tuesday. The rating agency said China's rising wages, higher land costs and real exchange-rate appreciation over the past decade reflected policy efforts at rebalancing the economy, as well as raise living standards, but have also reduced low-end manufacturing competitiveness. "The average Chinese manufacturing wage is now higher than in Asia's other major emerging economies. Finding cheap labour in China is only likely to become harder, with urbanisation rates already high and the working-age population set to shrink by 0.4 per cent a year on average over 2015-2035," it said. Fitch said a significant drop in China's low-end manufacturing over the coming decades would leave a large gap for lower-cost countries to exploit. Citing UN Comtrade, Fitch Ratings said China's global share of exports of clothing, footwear and furniture is still almost 40 per cent, up from 34 per cent in 2010, and only peaked in 2014. However the decline now appears to be gathering momentum as China's exports of these labour-intensive goods fell by 10 per cent in US dollar terms in 2016. Fitch said Bangladesh and Vietnam already had strong footholds in these sectors, with both accounting for eight per cent of global clothing, footwear and furniture exports in 2015, up from three per cent in 2010. "This established scale could be an advantage. Bangladesh, for example, has a ready-made garments industry that accounts for over 80 per cent of its exports, and the capacity to meet large orders swiftly. Vietnam looks well-positioned to expand its basic electronics manufacturing further through the relocation of factories from China. "In both countries the manufacturing sector is a key driver of the high and stable gross domestic product (GDP) growth rates that act as a rating strength. It is also an important source of export revenue, which supports external finances," it added. Moreover, Fitch said it views political violence, security problems and a loss of favour among foreign buyers, potentially resulting from renewed safety standard issues, as key risks to Bangladesh's garment industry and economic outlook. “Political instability and business-environment deficiencies already prevent some economies from making the most of opportunities stemming from China's development. For example, Pakistan's manufacturing output grew by only 4.3 per cent a year in 2012-2016, compared with over nine per cent in Vietnam and Bangladesh,” it added. Fitch said Pakistan is building closer relations with China through the Belt Road Initiative, which could eventually help it become a base for Chinese firms seeking lower costs, but foreign firms are currently deterred by security risks and infrastructure problems, particularly electricity shortages. The rating agency also said Myanmar is another frontier market that offers labour-cost advantages and has a workforce big enough to support a large-scale manufacturing industry. However, its continuing political problems - highlighted by the Rohingya crisis - nascent market system and poor infrastructure make it an unlikely manufacturing hub for the foreseeable future, it added. -- BERNAMA