In charts: How China's economic slowdown will shape the future
It is often said that when China sneezes, the world catches a cold. But the reality is that some countries are more at risk from a slowdown in China.
China is slowing down. By its own high standards, that is. In the first half of 2023, the Chinese economy grew at a rate of 5.5%, above the official 5% target, but well below its historical rate of growth. At the same time, it faces deflation and rising youth unemployment. These data points suggest an economic slowdown—a possibility that has sent shock waves around the world, because we have become used to a China that consistently grows at double-digit rates. Plus, it is so deeply embedded in global supply chains that a fall in Chinese demand is expected to have a wide impact. It is often said that when China sneezes, the world catches a cold. But the reality is that some countries are more at risk from a slowdown in China.
China is the world’s second-largest importing nation. Naturally, its import partners are very vulnerable to a weakening of Chinese demand. Top of the list are countries that export agricultural products (Brazil), fuel (Gulf nations, Malaysia), minerals and ores (Chile, Peru, Australia), electronics and chips (South Korea, Japan) and machinery (Germany) to China. Of these, the risk is higher for economies where exports contribute significantly to GDP, because they face sharp growth downgrades if a slowing China cuts back on imports. This means that the US, which exports four times more to China in dollar terms than, say, Chile, is less directly impacted because the US economy is led by domestic consumption rather than exports.
The big Chinese spender
In 2019, 155 million tourists travelled from China and collectively spent $254.6 billion. Their top destinations included Southeast Asia, South Korea, Japan, Taiwan, Australia, and Europe. Often travelling in large tour groups, they were big spenders, and supported jobs and incomes in many tourist centres. The covid-19 pandemic put an end to this flow. When China opened up, countries raced to attract Chinese tourists, but tourism has yet to reach pre-pandemic levels.
The global luxury market is another casualty of a slowing China. Before the pandemic, Chinese tourists travelled to the US and Europe to buy luxury goods to avoid taxes and tariffs in their home country. Nowadays they increasingly opt for domestic luxury brands, or buy from local duty-free retail outlets, which are allowed to sell international brands. Between 2019 and 2022, China’s share of the global personal luxury goods market dropped from 33% to 19%, suggesting that spending has become more cautious.
Shifting FDI flows
Foreign direct investments (FDI) into China dropped significantly in 2022, and reached an all-time low of $4.9 billion in the April-June quarter of 2023. One reason is that many foreign companies are considering shifting out, or at least avoiding new investment in China. That’s because US-China tensions, rising labour costs, and a data localization drive have worsened the business environment. There’s also the risk of devastating policy about-turns: recently, Apple lost nearly $200 billion in market valuation after China discouraged government employees from using iPhones.
Businesses want access to the large Chinese market without being caught up in geopolitics. So an increasingly popular solution is to set up alternate production bases. Emerging Asian economies are likely to be the main beneficiaries of any resulting FDI shifts from China. Lower-cost Vietnam has been supplementing China for some years now. Going forward, others like India, Malaysia, Indonesia and Philippines could attract more FDI.
Economic uncertainty
China’s slowdown is uneven: not all its sectors are slowing down. For instance, China dominates in renewable power and is the world leader in electrical vehicle production. In 2022, it beat Germany to become the world’s second largest automobiles exporter. On the other hand, purchasing managers’ indices for manufacturing and services are weak and give no indication of a recovery. Imports have declined in each month of 2023, exports have declined for four straight months, yet crude imports remain strong.
Such mixed signals make it tough to assess the extent and length of the slowdown, and add to the prevailing global economic uncertainty. The uncertainty is reflected in the exchange rates of countries that are the most closely linked to China: South Korea, Australia and Malaysia. These yuan proxies have been very volatile, appreciating when China opened up in January 2023, and then falling when the expected growth did not materialize.
The author is an independent writer in economics and finance.
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