China pushing up the value curve

With rising labor costs in China and new low cost competitors (such as Vietnam), margins are shrinking in the low-end product space. China has to continue product quality improvements and needs to make a larger push into the high-end markets. Such a shift requires significant infrastructure upgrade, which has in fact been taking place in recent years. This is evidenced by the changes in China's fixed asset investment (FAI). The real estate FAI (surprisingly) has been fairly constant in terms of market share, while investment in manufacturing (as a fraction of the overall FAI) has grown considerably. China's strategy in recent years has been to push up the value curve, and manufacturing FAI has been the beneficiary.

Source: ISI Group

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