SINGAPORE: An economic slowdown in China will have minimum impact on its imports of palm oil from Malaysia, said Credit Suisse managing director and head of China research Vincent Chan.
“Malaysia’s exports are geared towards the ‘soft’ commodities (such as palm oil). As the commodity is used for food staples such as cooking oil, its sensitivity to the level of economic growth is not that high,” said Chan in a media briefing session at the Credit Suisse 4th Annual Macro Conference and 6th Annual Asean Conference here yesterday.
Most emerging market economies, including Malaysia, are largely reliant on commodity exports as a revenue source. China is the world’s second-largest importer of edible oils and its level of demand has a huge bearing on Malaysian palm oil.
It is also Malaysia’s biggest palm oil export destination and currently accounts for about 60% of China’s total palm oil imports. In 2013, exports to China were valued at RM11.3 billion.
In a year marked by weak growth and manufacturing data as well as a weak property market — prompting a recent cut in interest rates for the first time in two years — China’s palm oil demand has seen a marked decrease.
According to Malaysian Palm Oil Board data, between January and November last year, palm oil exports to China amounted to 2.58 million tonnes, or a 22.65% decrease from 3.37 million tonnes in the same period in 2013.
Half of the world’s demand for commodities comes from China, particularly in “hard” commodities such as minerals, metals and crude oil.
For example, Chan said that a year-on-year reduction of 1% in China’s gross domestic product (GDP) could bring down its annual steel demand growth from 10% to zero. “However, the change in demand for soft commodities such as palm oil would be far less drastic,” he said.
He added that commodity producers would stand to lose the most if and when China’s economy goes into a prolonged deceleration.
“The biggest impact of a Chinese economic slowdown is not in China, [but on] commodity producers. An investment slowdown reduces demand for hard commodities, and countries such as Brazil and Australia have already been greatly affected. Chile, which is an exporter of copper, is feeling the heat as well.”
Furthermore, Chan said that he would not be surprised if China’s GDP were to moderate to below 6% by 2020.
“We are looking at a possible decline of half a percentage point in China’s GDP every two or three years. A prolonged slowdown would eventually hurt all of its commodity trading partners, so the impact will be huge.”
However, he ruled out the likelihood of a crisis situation in China or a so-called “hard landing” in its economy. This is because it has the financial firepower to intervene, as evidenced by its accumulated foreign reserves of about US$4 trillion (RM14.32 trillion).
Additionally, the recent surprise interest rate cut by the central bank on Nov 21 had buoyed Shanghai’s stock market as investors perceived the move to be the start of further monetary easing and the injection of more liquidity to prop up its economic growth trajectory.
While a moderation in growth has been widely expected for some time, Chan said that China’s economy should continue to outperform other major emerging market economies.
Credit Suisse is forecasting China’s GDP growth of 7.3% and 6.8% for 2014 and 2015 respectively. However, China’s annual total imports are expected to break US$1.9 trillion this year, a substantial increase from US$1.33 trillion in 2010.
This article first appeared in The Edge Financial Daily, on January 8, 2015.