KUALA LUMPUR: Malaysia is at particular risk of a slowdown in China trade, and is among emerging markets that are expected to drag down global trade growth this year, said JPMorgan.

In its Asia-Pacific Economic Research report yesterday, JPMorgan warned that a slowdown in China trade could affect commodity exporters to China, like Malaysia, Indonesia and Thailand.

“As a result, we have made a series of downward revisions of growth for 2015, with the revised growth forecast (for Asean) now looking at a 3.6% year-on-year expansion from 4.1% previously,” said the international bank.

China’s gross domestic product expanded 7.4% in 2014, its slowest rate of output growth in nearly a quarter of a century, stoking fears of a permanent slowdown.

China remains Malaysia’s second-biggest export market after Singapore — China imports about 12% of all Malaysian export products.

According to JPMorgan, slower growth and softening inflation should lead to a more aggressive policy response across the region.

However, JPMorgan noted that the anticipated normalisation of interest rates by the US Federal Reserve and the ensuing uncertainty of capital flows will constrain monetary policy, citing Malaysia, Indonesia and the Philippines.

“For the former two (Malaysia and Indonesia), these reflect measures to mitigate the slowdown in domestic demand.

“The main source of counter cyclical policy should be through public spending, but this has been slow in coming in both the Philippines and Thailand.

“In the case of Indonesia and Malaysia, the impact of lower commodity prices and slowing revenues is expected to limit expenditures, given ongoing efforts to contain the fiscal deficit.

“That said, the government could circumvent these restrictions through off-balance-sheet items, which could include direct and indirect guarantees, or more aggressive allocation of spending via state-owned enterprises,” it said.

According to JPMorgan, in addition to the sharper-than-expected cyclical slowdown, the spillover into the financial sector bears watching, especially in context of the rapid rise in bank credit in Asean since 2008.

“The combination of slowing growth and softening incomes is already leading to a rise in non-performing loans (NPLs) in some Asean countries.

“Indonesia has seen NPLs increase recently, and this development risks further tightening credit conditions as banks tighten up on lending standards and delay passing on lower interest rates to borrowers,” it said, adding that NPLs have also ticked up in Singapore and Thailand.

This article first appeared in The Edge Financial Daily, on July 10, 2015.