This article first appeared in Corporate, The Edge Malaysia Weekly, on May 30 - June 5, 2016.

DID you know that 12% of global takings for the Batman v Superman: Dawn of Justice movie were from China? There is nothing unusual about the fact, considering that one in five people in the world lives in China. But such facts are constant reminders of the global influence of the Chinese economy.

Note that in the first quarter of the year (1Q2016), the world’s most populous nation accounted for 47% of global gross domestic product (GDP) growth, was the source of US$385 billion worth of mergers and acquisitions (M&A) and consumed about 12% of the world’s commodities. It also contributed 30% to global investments last year.

China’s economic growth was years in the making. But the explosive speed at which it expanded and the scale of the expansion were spurred by the government’s stimulus package introduced in 2009/10 to prevent a recession in the country following the 2008/09 global financial crisis. A massive growth in bank credit meant Chinese businesses, particularly manufacturers, could borrow and invest freely, in the process transforming the country into the world’s factory. As the businesses prospered and the people became richer, some of the extra yuan was channelled into investments abroad.

However, China’s credit-fuelled growth is slowing and its debt is mounting. In 1Q2016, its GDP grew only 6.7% — its slowest in seven years — but its total debt-to-GDP ratio had soared from 170% in 2007 to 250% by the end of 2015. Most of the debt was incurred by the corporate sector with about US$1 trillion of it held in US dollars by non-financial sector companies. The International Monetary Fund has estimated that total corporate bank loans that are at risk of going bad are equivalent to around US$1.3 trillion or 7% of China’s GDP.

Marie Diron, senior vice-president at Moody’s Investors Service, notes that liquidity remains abundant in China, consistent with Beijing’s accommodative monetary policy, and that leverage will likely increase further.

Meanwhile, HSBC Global Research says keeping the credit tap flowing is something Beijing “can and should continue to do” to fight deflation.

With news of the country’s corporations defaulting on their bond repayment obligations, the world is fretting over the inevitability of a Chinese credit blow-up. However, economists polled by The Edge are confident that the possibility of the credit bubble bursting is “low” with most expecting Beijing to intervene to stem any systemic risk.

“Should an increase in the frequency of defaults have a significant impact on China’s financial sector and economy, the government will likely use its financial firepower to prevent a broad crisis. A range of actions may be taken, including direct support to financially distressed entities and to banks refinancing debt or entering debt-for-equity swaps,” says Diron.

Such expectation comes from years of watching how Beijing exercises its grip on the financial market to put a lid on homegrown troubles. Measures such as propping up or devaluing the renminbi, slashing interest rates, raising government spending, introducing new stimulus plans and sweeping up blue chips on the stock market have all made a cameo over the last year. It would be hard to bet against China confronting its debt burden and emerging a victor again.

But Malaysia, like many other emerging markets that fall within China’s widening sphere of influence and rely on its tireless growth for their own wealth, will find its debt bubble unsettling. A careless rise in borrowings is a familiar prelude to financial crashes.

Both Malaysian exports to and imports from China have quadrupled over the last 15 years. The republic emerged as Malaysia’s largest trade partner in 2009 and has kept the position since. In 1Q2016, 11.2% or RM20.81 billion worth of Malaysian exports were shipped to China. Meanwhile, 18.9% of Malaysian imports worth RM30.51 billion during the same period came from China. The picture, however, is different from China’s point of view — Malaysia accounts for only 3% of its imports.

With such robust trade relations, one economist says Malaysia is vulnerable to even a slight shift in the Chinese economy. The bursting of China’s credit bubble would send shock waves through Asean.

“The primary channel of impact of a bursting of the Chinese debt bubble would be through the trade channel. To the extent that such a bursting would weigh on China’s economy, the demand for Malaysia’s exports would be negatively affected,” comments Moody’s vice-president and senior credit officer Christian de Guzman. 

“A secondary related channel would be through the influence of Chinese demand on global prices for Malaysia’s commodity exports,” he adds.

At the same time, Chinese corporations have acquired an appetite for assets outside the national borders. For instance, China is involved in more M&A overseas with deals totalling US$385 billion last year, up 213% from 2014.

According to HSBC Global Research, anecdotal evidence suggests that the number of cross-border deals in 1Q2016 had already exceeded the total amount for the whole of 2015. Roughly 85% of China’s foreign direct investment (FDI) goes to the emerging markets.

Sudhir Shetty, chief economist for the East Asia-Pacific region at the World Bank, notes that Malaysia’s experience with Chinese FDI is part of a larger trend of Chinese investors looking for alternative investments.

“It is part of a larger pattern. China is now the largest source of FDI in this region. This is healthy because what it is showing is that Chinese investors are looking for alternative investors. The FDI flows reflect that China is getting richer and expanding in various sectors,” he says.

So far, China’s investing presence in Malaysia is small but growing. Its investments in Malaysia have tripled in the last three years, totalling RM3.37 billion as at 4Q2015. This excluded the RM26.56 billion from Hong Kong, the fifth largest contributor to FDI inflow during the period.

Economists note that Hong Kong investments could be beneficially owned by mainland Chinese investors. With the RM9.83 billion acquisition of Edra Global Energy Bhd by China General Nuclear Power Corp and a RM7.42 billion deal for a stake in Bandar Malaysia by China Railway Engineering Corp, China is expected to emerge as one of Malaysia’s most significant FDI contributors.

The bursting of the credit bubble in China will pose no immediate risk to Malaysia because its FDI sources are well diversified with the largest foreign investors being Singapore, Japan, the Netherlands and the US as at end-2015, say economists. A sudden withdrawal of Chinese FDI is also unlikely, given the illiquid nature of China’s investments here, although weaker investment flow in the longer term might be expected.

China’s debt may not be drowning Malaysia’s economy yet but important policy measures should be taken to limit the latter’s vulnerability to the former’s expanding reach.

Rajiv Biswas, chief economist at IHS Global Insights, opines that diversifying Malaysia’s export and investment relationships to other countries is one such measure.

“Other countries in Asia are taking practical steps, such as revising national legislation to prevent excessive domination of foreign ownership in key sectors, such as natural resources, agriculture, residential property and strategically important industries. For example, Malaysia’s national interest should be an important part of the approval process for the acquisition of natural resources, agricultural land or strategic industries,” he explains.

Exposure to China and the tides of the global economy is the fault of an open economy. But Malaysia can prepare itself against the looming Chinese tide.

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