China’s New Industrial Revolution

FOR the first time in over a century， following the international financial crisis， the U.S. has been displaced as the world’s largest industrial producer– this position now being taken by China. This period also witnessed the greatest shift in the balance of global industrial production in such a short period in world economic history.

In 2007， according to UN data， China’s total industrial production was only 62 percent of the U.S. level. By 2011， the latest available comparable statistics indicated that China’s industrial output had risen to 120 percent of the U.S. level. China’s industrial production in 2011 was US$2.9 trillion compared to US $2.4 trillion in the U.S. – this data is shown in Figure 1.

When the comparable data is released for 2012， China’s lead will have increased substantially – between December 2011 and December 2012 China’s industrial output increased by 10.3 percent whereas U.S. industrial production increased by only 2.7 percent. Calculations based on estimates in the CIA’s World Factbook indicate that in 2012 the value of China’s industrial production was US $3.7 trillion compared to US $2.9 trillion for the U.S. – which means China’s industrial production was 126 percent of the U.S. level.

Taking only manufacturing – excluding mining， electricity， gas and water production – in 2007 China’s output was 62 percent of the U.S. level， by 2011 it was 123 percent. Again the gap has widened in 2012 and 2013.

No other country’s industrial production approaches that of China – in 2011 China’s industrial output was 235 percent of Japan’s and 346 percent of Germany’s.

World Bank data， using a slightly different calculation of value added in industry， confirms the shift： China’s industrial production in 2007 was only 60 percent of the U.S. level， whereas by 2011 it was 121 percent.

Therefore， in only a six-year period China has moved from its industrial production being less than two thirds of the U.S. to overtaking the U.S. by a substantial margin. If China was the “workshop of the world” before the international financial crisis it is far more so now.

The trends producing these shifts are shown in Figure 2. In six years China’s industrial output almost doubled while industrial production in the U.S.， Europe and Japan has not even regained pre-crisis levels. To give precise statistics， between July 2007 and July 2013 China’s industrial production increased by 97 percent while the U.S. industrial output declined by one percent. Industrial production data for July is not yet available for the EU and Japan， but between June 2007 and June 2013 EU industrial output fell by nine percent and Japan’s by 17 percent.

It is this enormous rise in China’s output which also drove the much discussed global shift in industrial production in favor of developing countries – in the six-year period ending in June 2013， the latest date for which combined data is available， industrial production in advanced economies fell by seven percent while output in developing economies rose by 65 percent.

As is clear from Figure 3， China accounted for the overwhelming bulk of the increase in developing economies. Industrial production in Latin America rose by five percent， in Africa and the Middle East by six percent， and in Eastern Europe by 10 percent. But China’s industrial production in this period rose by 100 percent – industrial output in developing Asia as a whole rose by 65 percent， but the majority of this came from China.

Between 2007 and 2011 China’s industrial production rose by US $1，465 billion in current prices， while U.S. industrial output rose by only US $88 billion in current prices and declined slightly in inflation adjusted terms. China’s industrial production rose 17 fold that of the U.S.

Such a rise in China’s industrial production has consequences spreading far beyond industry itself. Industry has easily the most rapid increase in productivity of any economic sector – notably compared to services. The decline of industrial production in the EU and Japan， and relative stagnation in the U.S.， means that China is closing the productivity gap between itself and the more advanced economies. This is crucial for progress in raising China’s relative GDP per capita and living standards.

This rising productivity also explains why China’s exports have been able to maintain their competitiveness despite substantial increases in the exchange rate of the RMB， China’s currency . According to Bank for International Settlements data， the RMB’s nominal exchange rate rose by 25 percent between July 2007 and July 2013. But China’s real effective exchange rate， that is taking into account the combined effect of the nominal exchange rate and inflation， rose by 31 percent. Despite this major currency revaluation. China’s exports continued to exceed its imports.

China’s ability to successfully absorb such high increases in its exchange rate， due to high levels of industrial productivity increases， directly translates into relatively lower prices of imports and improved relative living standards for its population.

The data also settles the dispute between who believed there was a major industrial revival in the U.S.， such as the Boston Consulting Group， and Goldman Sachs and other analysts who have correctly concluded no such major revival has occurred. Those in China， such as Lang Xianping， who wrote that a great U.S. industrial revival was taking place and China’s industry was in crisis， now look foolish.

It is important not to exaggerate China’s advance. China’s industrial output is now considerably larger in value terms than that of the U.S.， but the United States retains a substantial technological lead which it will take China a considerable period to catch up on. After a long period of globalization and consolidation by U.S. companies – both processes are only in their early stages in China – U.S. manufacturing firms are four times the size of China’s in terms of overall global revenue， although between 2007 and 2013 Chinese manufacturing firms overtook Germany to become the third largest of any country.

The scale of these changes in world industrial production also makes clear that， in comparison to developments in China， gas and oil “fracking” in the U.S.， which has attracted widespread media attention， is a sideshow. As already noted overall U.S. industrial production has not even recovered to pre-crisis levels.

For the first time for over a century the U.S. has been definitively replaced as the world’s largest industrial producer. Such a historic shift can only be described as a revolution in the situation of the world economy.