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Unfavorable factors are expected to dilute the machinery industry will enter a long period of prosperity
Editor's Note: The equipment manufacturing industry is a critical reflection of a nation's overall industrial capability. The ability to develop large-scale machinery serves as a key indicator of a country's industrialization level and national strength. In the new phase of the 21st century, China's equipment manufacturing sector faces both unprecedented challenges and significant historical opportunities as it advances toward a moderately prosperous society and embarks on a new path of industrialization.
After experiencing a period of glory in 2006, the growth rate of China’s machinery industry slowed down in 2007. This decline was primarily attributed to several factors: first, the cyclical nature of the industry; second, structural price increases led to inflation concerns, with intermediate industries like machinery facing pressure from rising costs; and third, market anxieties about the impact of RMB appreciation on export growth.
So, would the machinery industry in 2008 re-achieve high growth similar to 2006, or would it continue to stabilize as it did in 2007? Despite these challenges, the machinery industry has some resilience. It can absorb cost increases through internal efficiency improvements, and strong demand in sectors like shipbuilding and high-end CNC machine tools has created capacity constraints, leading to a seller’s market. This allows for some pricing power. Additionally, since exports account for a relatively small portion of the industry, the impact of RMB appreciation is limited, and imports of key components have helped offset some of this pressure. As such, many negative factors are expected to ease in 2008, potentially leading to renewed industry prosperity.
**A. Huge Investment Drives Long-Term Growth**
The machinery industry is highly correlated with fixed asset investment. Its final products are mostly capital goods, making it a typical investment-driven cyclical industry. In 2006, China's fixed asset investment grew by 24%, driving the machinery industry to reach 5.49 trillion yuan, up 31.4% year-on-year. In the first three quarters of 2007, fixed asset investment rose by 26.4%, and the machinery industry's output grew by 32.01%.
China's urban fixed asset investment in 2006 reached 9.35 trillion yuan, with 2.204 trillion yuan allocated to equipment purchases, accounting for 21.86%. By January–October 2007, urban fixed asset investment totaled 8.64 trillion yuan, with 1.90 trillion yuan spent on equipment, representing 21.96% of total investment.
During the demographic dividend period, which lasted until 2013, China experienced higher savings rates than consumption, creating excess liquidity that fueled investment. High returns on investment attracted substantial capital inflows, supporting robust fixed asset investment. As China moved into the mature stage of industrialization, demand for advanced machinery increased, further boosting the industry.
Investment remained a major driver of economic growth. In 2006, consumption, investment, and net exports accounted for 39.2%, 42.2%, and 18.7% of GDP growth, respectively. However, as global conditions shifted in 2008, the role of net exports declined, placing greater emphasis on investment. This trend is expected to continue for several years, with fixed asset investment driving the machinery industry into a long-term growth cycle.
Despite macroeconomic controls, the influence of policy remains significant. A neutral fiscal policy and tight monetary policy may reduce investment growth, but the diversified funding sources—such as private capital, foreign investment, and bond issuance—help mitigate these effects. Structural adjustments also aim to ensure healthy and sustainable growth.
**B. Policy Support Expands Industry Opportunities**
During the "Eleventh Five-Year Plan" period, China elevated the revitalization of its equipment manufacturing industry to a national priority. Policies focused on strengthening innovation, offering tax incentives, and promoting domestic equipment use. These measures not only eased the impact of macro-control but also expanded the industry's growth potential.
Import substitution and export expansion are key strategies for increasing market share. Currently, two-thirds of China’s equipment investment depends on imports, but efforts to reduce import dependency have already begun. With continued policy support and innovation, China's equipment manufacturing industry is poised for significant growth.
**C. Historic Opportunities Create a Favorable Business Climate**
China’s equipment manufacturing industry is now more competitive and capable. After decades of development, it has established a comprehensive industrial system and is becoming a key pillar of the economy. Industrialization has driven demand for advanced machinery, while international industrial transfer offers new opportunities for growth.
Economic globalization and technological progress have accelerated the shift of equipment manufacturing to developing countries. China is well-positioned to benefit from this trend, leveraging its labor and resource advantages to expand into global markets.
In summary, despite challenges, the Chinese equipment manufacturing industry is entering a period of sustained growth, supported by strong investment, favorable policies, and strategic industrial development.