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2 game changer factors that could affect the situation of production in China in the upcoming future

The mechanical manufacturing industry in China is going through dark days due to the covid 19 epidemic, which has led to a series of consequences related to production stagnation, rising material prices and anxiety from suppliers. However, the upcoming developments can positively affect and completely change the landscape for China's vulnerable manufacturing industry.

Factor #1: Manufacturing could return to China, as Covid cases spike in India and Vietnam

The Covid-19 resurgence in some parts of Asia could lead to a change in fortunes for China, according to an economist.

Previously, the U.S.-China trade war caused companies to move their supply chains out of China, shifting their production and distribution networks for products and services. As a result, countries like Vietnam and India benefited as companies moved to set up shop in their countries.

But the situation appears to be changing, and supply chains could pivot back to China as cases spike in India and Vietnam, according to Zhang Zhiwei, chief economist at Pinpoint Asset Management.

“Before the pandemic, we saw factories moving out of China — Samsung, Foxconn these big name companies — setting up factories in Vietnam, India,” he told CNBC’s “Street Signs Asia” on Monday.

The spike in cases in those two countries has forced factories owned by Taiwanese contract manufacturer Foxconn, a major Apple supplier, to shut down facilities in India and Vietnam, he said.

“This could put the relocation of supply chains on hold for quite some time. The key issue here is that international travel is suspended, so multinational companies can’t send their staff to India and Vietnam to set up new factories,” Zhang added.

In Vietnam, the northern province of Bac Giang on Tuesday ordered four industrial parks — including three that house production facilities of Taiwan’s Foxconn — to temporarily shut down due to an outbreak of Covid-19.

The situation could benefit China, Zhang suggested. However, he pointed out that the extent of how much China could stand to gain will depend on how long the situation in India and Vietnam continues for.

Right now, export growth in China is between 20% to 40% a month, he said. If the factories in India and Vietnam return to production very soon, China’s exports would be expected to slow down in the second half of the year as companies move their manufacturing to those two countries.

“But if supply chain (in India and Vietnam) is disrupted for a long time, we could see this kind of 20%, 30% export growth (in China) to continue into next year,” Zhang said.

Factor #2: the US-China relationship return to the " new norm"?

Chinese Vice Premier Liu He exchanged views with U.S. Treasury Secretary Janet Yellen on issues of mutual “concern”, in his second virtual call in a week with top economic and trade officials under the U.S. Biden administration.

Liu, who has led China’s negotiations in Sino-U.S. trade talks since former U.S. President Donald Trump went on a trade war with Beijing, held a similarly “candid” exchange with U.S. Trade Representative Katherine Tai on May 26.

"Secretary Yellen discussed the Biden-Harris administration's plans to support a continued strong economic recovery and the importance of cooperating on areas that are in U.S. interests, while at the same time frankly tackling issues of concern," the U.S. Treasury Department said in a brief statement.

In Liu's video call with Yellen on Wednesday, both sides conducted extensive exchanges on the macroeconomic situation and bilateral and multilateral cooperation, the official Xinhua news agency reported.

"The two sides believed that the China-U.S. economic relations are very important," Xinhua said.
The Biden administration is conducting a review of U.S.-China trade policy, ahead of the expiry of their Phase 1 deal at the end of 2021.

Beijing and Washington signed the deal in January 2020. It calls for China to increase purchases of U.S. agricultural goods, manufactured products, energy and services by $200 billion over 2020 and 2021, compared with a 2017 baseline.

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