 The COVID-19 pandemic has triggered an acceleration in digitalisation and automation  Policy support will likely reinforce the sustainability of this trend…  …and fuel a long-lasting upturn in manufacturing investment Weakening PMIs and other key data points have raised concerns about the risk of a sharp slowdown in y-o-y GDP growth to below 5% heading into next year. But we believe these concerns are overplayed as we expect a long-lasting upcycle in manufacturing investment to become a new growth engine in the coming years. On top of positive cyclical factors, such as a broad-based recovery in industrial profits and higher than normal capacity utilisation rates, the pandemic-induced acceleration in digitisation and automation will likely fuel stronger manufacturing investment in the years ahead.

Since the COVID-19 outbreak in Q1 2020, investment in digitalisation and automation has been accelerating. HSBC Qianhai’s industrial equity research team expects sales of industrial automation production to record 20% y-o-y growth in 2021, up from low singledigit growth in the last two years. The development of the Industrial Internet of Things has also speeded up. China Academy for Information and Communications Technology estimates the value-added of the industry to rise 50% y-o-y in 2021, reversing the deceleration trend in the last few years. All this has led to a recovery in industrial capex spending, with the 2-year compound annual growth rate (2-year CAGR) of listed manufacturers’ capex spending rising to 6.2% in H1 vs a small contraction in 2019 before the pandemic. We expect the 5-year CAGR of manufacturing investment to improve to 78% from 3.8% during the last five years. We expect this acceleration in digitisation and automation to be sustained in the coming years for three reasons:  There is still huge potential for China to play catch up with developed economies in this area. Only 21% of manufacturing value-added in China is driven by digitalisation, much lower than the 33% average for developed countries. China's industrial robot density is also only around one-fifth of leading countries such as Singapore and South Korea. Meanwhile, within China, there is also a big gap in digitalisation between leading and laggard companies.

 Beijing will likely double down on policy incentives to promote digitalisation and smart manufacturing in the coming years as they are key components of China’s technology self-sufficiency strategy. Likely measures include further tax cuts and exemptions for manufacturers’ investments in technology upgrading, as well as favourable credit policies.

 An anticipated policy push under the 14th Five-year Plan to develop smart cities and other digital infrastructure. This should generate more demand for domestic high-tech equipment manufacturing, and lay the foundations for a faster digital transition by manufacturers in more sectors and regions.