China’s economy was meant to drive a third of global economic growth this year, so its slowdown in recent months is sounding alarm bells across the world.
Politicians are bracing for a hit to their economies as China’s imports of construction materials to electronics slide. The manufacturing firm Caterpillar said Chinese demand for machines used on building sites is worse than previously thought. US President Joe Biden called the economic problems a “ticking time bomb”.
Global investors have already pulled more than $10 billion from China’s stock markets, with most of the selling in blue chips. Goldman Sachs and Morgan Stanley have cut their targets for Chinese equities, with the former warning of spillover risks to the rest of the region.
Asian economies are taking the biggest hit to their trade so far, along with countries in Africa. Japan reported its first drop in exports in more than two years in July after China cut back on purchases of cars and chips. Last week, central bankers from South Korea and Thailand cited China’s weak recovery for downgrades to their growth forecasts.
It’s not all doom and gloom, however. China’s slowdown will drag down global oil prices, and deflation in the country means the prices of goods being shipped globally are falling. That’s a benefit to countries like the US and the UK which are still battling high inflation.
Some emerging markets like India also see opportunities, hoping to attract the foreign investment that may be leaving China’s shores.
A prolonged slowdown in China will hurt, rather than help, the rest of the world. An analysis from the International Monetary Fund shows how much is at stake: when China’s growth rate rises by 1 percentage point, global expansion is boosted by about 0.3 percentage points.
In an interview on Bloomberg TV, Peter Berezin, chief global strategist at BCA Research, said China’s deflation “isn’t such a bad thing” for the global economy. “But, if the rest of the world, the US and Europe, falls into recession, if China remains weak, then that would be a problem – not just for China but for the whole global economy,” he said.
Here’s how China’s slowdown is rippling across economies and financial markets.
Trade Slump
Many in Asia, count China as their biggest export market for everything from electronic parts and food to metals and energy.
The value of Chinese imports has fallen for nine of the last 10 months as demand retreats from the record highs set during the pandemic. The value of shipments from Africa, Asia and North America were all lower in July than a year ago.
Africa and Asia have been the hardest hit, with the value of imports down more than 14 per cent in the first seven months of 2023. Part of that is due to a drop in demand for electronics parts from South Korea and Taiwan, while falling prices of commodities such as fossil fuels also affected the value of goods shipped to China.
So far, the actual volume of commodities such as iron or copper ore sent to China has held up. But if the slowdown continues, shipments could be hindered, which would affect miners in Australia, South America and elsewhere.
Deflation Pressure
Producer prices in China have contracted for the past 10 months, meaning the cost of goods being shipped from the country is falling. That’s welcome news for people around the globe still struggling with high inflation.
The price of Chinese goods at US docks has fallen every month this year. It is likely to continue until factory prices in China return to positive territory. Economists at Wells Fargo estimate that a ‘hard landing’ in China – which they define as a 12.5 per cent divergence from its trend growth – would cut the baseline forecast for US consumer inflation in 2025 by 0.7 percentage points to 1.4 per cent.
Slow Tourism Rebound
Chinese consumers are spending more on services, like travel and tourism, than on goods – but they’re not yet venturing overseas in large numbers. Until recently, the government had banned group tours to many countries. Across the country, there is still a lack of flights, meaning it’s much more expensive to travel than before the pandemic.
The Covid pandemic and weak economy have curbed incomes in China, while the years-long housing market slump means homeowners feel less wealthy. It may take a long time for overseas travel to rebound to pre-Covid levels, hitting tourism-dependent nations in Southeast Asia such as Thailand.
Currency Impact
China’s economic woes have pushed the currency down more than 5 per cent against the dollar this year, with the yuan close to breaching the 7.3 mark this month. The central bank has escalated its defence of the yuan through various measures, including daily currency fixings.
The depreciation in the offshore yuan is having a greater effect on its peers in Asia, Latin America and the Central and Eastern Europe bloc, Bloomberg data show, with the correlation of the Chinese currency to some others rising.
The weak sentiment spillover may weigh on currencies like the Singapore dollar, Thai baht, and Mexican peso as correlations rise, according to Barclays Bank.
“With the weaker China economy, it’s very difficult to be optimistic on the Asian economies and currencies and we’re more concerned about the metal-exposed currencies,” said Magdalena Polan, head of emerging market macro research at PGIM Weakness. The construction sector may see currencies of commodity-led economies, such as the Chilean peso and South African rand, suffer, she said.
The Australian dollar, which often trades as a proxy for China, has lost more than 3 per cent this quarter, the worst performer in the Group-of-10 basket.
Bonds Lose Appeal
China’s interest rate cuts this year have reduced the appeal of its bonds to foreign investors, who have cut their exposure to the market and are looking for alternatives in the rest of the region.
Overseas holdings of Chinese sovereign notes are at the lowest share of the total market since 2019, according to Bloomberg calculations. Global funds had turned more bullish on the local currency bonds of South Korea and Indonesia as central banks there near the end of their interest-rate hiking cycles.
Luxury Stocks
Companies from Nike to Caterpillar have reported a hit to their earnings from China’s slowdown. An MSCI index that tracks global companies with the biggest exposure to China has retreated 9.3 per cent this month, nearly double the decline in the broader gauge of world stocks.
A gauge of European luxury goods and Thailand travel and leisure also track losses to China’s onshore equity benchmark. The sectors are “accurate reflections of how global investors may take indirect exposure to China and the outlook as China’s economy continues to weigh,” said Redmond Wong, a market strategist at Saxo Capital Markets in Hong Kong.
Luxury goods firms such as Louis Vuitton bags-maker LVMH, Gucci-owner Kering and Hermes are particularly vulnerable to wobbles in Chinese demand.
