Global investment banks (IBs) and capital markets are turning their attention to Greater China—the world’s largest manufacturing hub and the financial center of Asia. “Capital Hub” is a series covering news from China and the Greater China capital markets. From the mainland markets in Shanghai and Shenzhen to Hong Kong’s dollar liquidity hub and Taiwan’s semiconductor value chain, this series traces the flow of capital across the Greater China region and captures the current temperature and direction of these markets as Asia’s financial hub. [Editor’s Note]

[E-Daily Marketin Reporter Won Jae-yeon ] China’s manufacturing sector has re-entered an expansionary phase. However, this is not because Chinese households are opening their wallets or companies are increasing investment. Rather, it is due to a surge in artificial intelligence (AI) infrastructure investment—led by the United States—which has boosted China’s exports of semiconductors and computer equipment. While China’s high-tech manufacturing plants are rapidly accelerating amid the AI boom, the local real estate market, consumer spending, and employment indicators remain sluggish.

Chinese Factories Reviving Amid AI Investment Boom

According to China’s National Bureau of Statistics, the Manufacturing Purchasing Managers’ Index (PMI) for June stood at 50.3, surpassing the benchmark of 50 for the first time in a month. While both production and new orders entered an expansionary phase, the rebound was driven in particular by an increase in new export orders. Rather than a revival in domestic consumption, it was overseas orders that boosted factory operations.

Overseas orders were not evenly distributed across all manufacturing sectors. As global Big Tech companies expanded their data centers to compete in the AI model race, demand surged for semiconductors and memory used in servers, as well as computing equipment and power infrastructure. China, with its supply chain spanning from electronic components to assembly and its massive production capacity, was able to quickly absorb the surge in orders. In May, exports of integrated circuits rose 110.9% year-over-year, while exports of automatic data-processing equipment increased by 66.1%. These two categories alone accounted for 48% of China’s total export growth for the month.

In fact, sales at Chinese server manufacturers also rose significantly. Last year, Industrial Alliance (Foxconn Industrial Internet), a company listed on the Shanghai Stock Exchange, reported cloud computing revenue of 602.7 billion yuan (approximately 133 trillion won), an 88.7% increase from the previous year. In particular, revenue from AI servers supplied to global cloud companies more than tripled compared to a year earlier.

In addition, China’s efforts over the past few years to expand its production capacity in semiconductors, AI, and advanced equipment played a timely role. Previously, the Chinese government, seeking to move beyond the limitations of real estate-driven growth, prioritized so-called “new-quality productive forces” and concentrated policy-based financing and subsidies on advanced manufacturing. “New-quality productive forces” refers to a policy China introduced around the time of the 2023 real estate crisis, signaling its intent to move away from a growth model reliant on real estate and low-wage labor and instead create new growth engines through technological innovation and productivity improvements.

Chinese authorities mobilized policy-based financing and subsidies to expand related factories and facilities. Despite sluggish domestic demand, production capacity in high-tech industries continued to grow, and expanding global AI investment filled the order books for these production lines.

Factories Are Running, but Hiring Stagnates... The Domestic Demand Freeze Persists Despite the AI Boom

The problem is that the boom in AI manufacturing has failed to spread to the broader economy. The semiconductor and server industries invest more capital in equipment and technology than in labor. Even as production increases, employment does not grow at the same pace, and orders are concentrated among a few large corporations and in regions with a high concentration of electronics industries. Unlike in the past when real estate construction or consumer goods production picked up, the current structure makes it difficult for income to spread widely to construction workers, small and medium-sized subcontractors, and local commercial districts.

The fact that companies are not confident that AI demand will lead to a long-term boom is also hindering job growth. Orders for high-tech manufacturing are concentrated on specific products and companies, while demand in other sectors remains weak. From a corporate perspective, while companies can increase the utilization rates of existing production lines, significantly expanding their permanent workforce and equipment poses a major burden. In fact, China’s June manufacturing employment index stood at 48.5, below the benchmark line, and the small business PMI also remained at 48.2.

As always, real estate remains the main drag on domestic demand. Since a significant portion of Chinese household assets is tied up in housing, falling home prices and sluggish transactions immediately freeze consumer sentiment. According to the National Bureau of Statistics, retail sales in May fell compared to the same month last year, and real estate development investment from January through May also declined by 16.2%. While semiconductor and server production lines are running at full capacity, companies reliant on domestic demand remain hamstrung by insufficient orders and weak consumption.

AI exports have provided some relief to China’s manufacturing sector, but they have not been enough to thaw the frozen domestic market. Unless the export boom translates into jobs, wages, and consumption, the current rebound is likely to remain limited to a boom in certain high-tech industries. Moreover, the moment the investment fervor of global Big Tech cools, the manufacturing recovery—which relies on overseas orders—could also falter.