Investors are keeping a close watch on China as it emerges from three years of pandemic restrictions. However, shifting supply chains are also a driving force in the industrial recovery – and they are not necessarily inflationary. Consumers are in the focus as China reopens after three years of Covid restrictions, affecting industrial midstream companies.
In December, China had a major wave of Covid infections, which significantly impacted production activities throughout the industrial value chain. However, the companies experienced an excellent production recovery in January, with 90% of their staff returning to work and operations returning to normal.
In 2022, there was a significant disruption to supply chains, logistics, and transportation networks, but now it is normalizing, and industrial activity is increasing. In addition, demand is rebounding due to policy stimulus and consumer demand recovery and is boosting demand for some industrial companies, such as those manufacturing household appliances or consumer goods.
Companies are also hedging or restructuring their supply chains. Many Chinese companies have recognized the need to localize or shorten their supply chains to reduce logistical or transportation disruptions risk. They will grow more competitive in the future with their end products.
In the chemicals industry and the automotive supply chain, localized supply chains are driving down costs. Previously, many auto original equipment manufacturers (OEMs) relied on overseas suppliers for crucial components such as connectors. However, they are increasingly purchasing locally, which can lower costs by 20% to 30%, in turn, will eventually result in cheaper car pricing.
Some of this localization is driven by geopolitical considerations and trade restrictions, which will benefit Chinese enterprises. For example, domestic companies replacing foreign competitors as suppliers are receiving more orders from their local consumers, thus increasing their market share in China.
China’s reopening in recent weeks has caused excitement in markets, which is likely to continue. Looking at overall activity, people are no longer afraid of Covid and feel comfortable enough to go offline and engage in various other consumption activities. On the industrial side, we observe supply chain logistics returning to normalcy and a very strong recovery in industrial action.
There are some worries regarding a second Covid outbreak. There is also a risk from the external environment. A persistent global recession may affect the overall demand for Chinese exports. Geopolitics is another issue that companies should always be aware of as well.
