This article first appeared in Forum, The Edge Malaysia Weekly on October 17, 2022 - October 23, 2022
Widely dubbed the Chinese Economic Miracle, China has undergone rapid economic development and made the shift from relative isolation to deep global integration. This speedy expansion in a short span of three decades has spurred China’s rise to become the second largest economy in the world. But to quote a popular superhero adage, “With great power comes great responsibility”. As a global economic superpower, anything China does would also have a substantially larger impact — positive or negative — on the rest of the world.
China’s global influence has also expanded over the last 10 years. While China started by establishing itself as the “factory of the world”, the country is more than just a production hub today. It is also now counted among the world’s largest consumer markets for final goods and services (purchases by the end-consumer not for reselling or used in production).
Therefore, it is particularly concerning that the World Bank recently downgraded its forecast for China’s 2022 gross domestic product growth to just 2.8%, from its 8.1% growth in 2021, over expectations that its zero-Covid policies would markedly inhibit its private consumption. These expectations were in addition to the constant disruption of industrial production and stretched global supply chains since the start of the pandemic. This means any economic slowdown in China would have an even more profound impact now than before, given the added pressure on the consumption demand front.
To put the size of Chinese consumption demand into perspective, let us look at some statistics. Note that this data takes into account global value chain linkages and traces both direct and indirect exports for final consumption in a foreign country at the end of the supply chain. Here, we will be examining the share of final consumption demand that can be attributed to China and making some comparisons to the US and Europe.
The share of value-added (gross output generated domestically less inputs used) produced across major regions for eventual consumption in the Chinese market has approximately doubled every 10 years. China accounts for around 20% of Asean’s total exported value-added in 2018, up from 11% and 5% in 2008 and 1998 respectively. A similar pace of increase in export share is observed for the North American and European regions as well. Around 15% of value-added produced in the two regions were meant to fulfil final demand in China, almost double the 8% share charted in 2008 and 3% in 1998.
Within Asean, Malaysia is especially exposed to the negative impact arising from a slowdown in Chinese consumption demand. China represents the largest source of foreign final demand for Malaysia at 21%, higher than our exposure to US and Europe respectively at 15% and 13%. The notable reliance on Chinese demand would mean that a 1% decline in final demand from China would reduce Malaysia’s GDP by approximately 0.08%, more significant than a fall in demand from the US and Europe at 0.06% and 0.05% respectively. In contrast, Indonesia, Thailand and Vietnam’s exposure to China is relatively smaller at 19%, 16% and 18% respectively.
The slower domestic demand in China comes at an inopportune time as major western economies are dealing with the effects of the ongoing Russia-Ukraine war. Over the last two economic crises, we have not experienced a synchronised slowdown in aggregate demand. During the global financial crisis (2008), China’s economy was relatively unscathed while during the Asian financial crisis (1997), the US and Europe continued to chart healthy economic growth. Hence, the fall-off in external demand this round will be more significantly felt by Malaysian businesses.
A common saying has it that when the US sneezes, the world catches a cold. With the growing importance of the Chinese market to Malaysia and the rest of the world, one would argue that we can say the same for China. The expectation of weaker economic activity in China, due not only to supply chain linkages to the US and Europe but also the slowing consumption demand in China, could see relatively lacklustre demand prospects for Malaysia moving forward. Under these circumstances, it would be best for Malaysia to harness our inner strength — improving our economic fundamentals and income levels while also diversifying our external export markets. All these would help to buoy Malaysia’s economic growth under these uncertain global economic conditions.
Woon Khai Jhek, CFA, is a senior economist and head of the Economic Research department at RAM Rating Services Bhd
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