How China’s slowdown may spill over to Malaysia

China’s slowdown is a key risk for the world economy, commodities and energy markets as well as the semiconductor industry. — Bloomberg

CHINA’S stuttering economic recovery post-Covid-19 pandemic reopening has stirred concerns that a protracted deep economic slowdown will have global repercussions, given its interconnectedness with each and every economy in this globalised world and transmission to both emerging and developed countries through different channels.

A slowing China economy is a bane for the world economy. While the global economy continues to gradually recover in 2023, the growth remains weak and low by historical standards, and the balance of risk remains tilted to the downside. It is not out of the woods yet.

Global manufacturing and services activities are losing momentum. Global trade, especially exports, remain in the doldrums, weighed down by weak consumer and business spending amid a continued inventory adjustment in the semiconductor sector.

Prices of commodities and energy have also softened. Global monetary tightening has started to weigh down on activity, credit demand, households and firms’ financial burden, putting pressure on the real estate market.

A slew of disappointing economic data for two consecutive months (June and July) from China indicated that the world’s second-largest economy (17.8% of the world’s gross domestic product or GDP) is indeed losing steam.

Falling exports, weak consumer spending, slowing growth in fixed investment and continued concerns about the property sector have dampened the recovery.

The emergence of deflation concerns adds to the complexity of China’s flagging recovery.

The Chinese government has provided a range of strategic measures aimed at targeting specific sectors.

These range from consumption (spending on new energy vehicles, home appliances, electronics, catering and tourism) to the property sector (reducing down-payment ratios for first-time homebuyers, lowering mortgage rates and easing purchase restrictions for buying a second house) and tax relief measures to support small businesses, tech startups and rural households.

China’s slowdown is a key risk for the world economy, commodities and energy markets as well as the semiconductor industry.

Prior to the Covid-19 pandemic, China was the world’s most important source of international travellers, accounting for 20% of total spending in international tourism (US$255bil overseas and making 166 million overseas trips in 2019).

We consider three channels through which China’s slowdown can have spillover effects on Malaysia via direct and indirect transmissions: trade and commodity prices, services and financial markets.

Overall, the estimated impact of a 1% decline in China’s GDP growth could impact about 0.5% points on Malaysia’s economic growth.

Trade is the most important channel as China has been Malaysia’s largest trading partner since 2009, with a total trade share of 16.8% (exports share: 13.1%; imports share: 21.2%) in the first half of 2023 (1H23).

Spillovers from slower China demand and commodity prices are negative for Malaysia, a net commodity exporter.

After recording seven successive years of increases in exports to China since 2017, Malaysia’s exports to China declined by 8.8% in 1H23.

In sectors such as tourism, China’s tourists are one of the major foreign tourists in Malaysia. In the first five months of 2023, Chinese tourists totalled 403,121 persons or 5.4% of total international tourists in Malaysia, and was only 12.9% of 3.1 million persons in 2019.

According to the Malaysia Inbound Tourism Association, though the number of Chinese tour groups coming to Malaysia has increased in July and August to between 800 and 1,000 for the summer vacation, the number of tourists per group is smaller between 10 and 20 persons.

While direct financial links between China and Malaysia are limited, there will be indirect spillovers through spikes in global financial volatility as investors worry that China’s deep economic slowdown would temper global growth, and also has spillovers to the US economy.

Will China foreign direct investment (FDI) inflows into Malaysia slow?

Capital movements will be influenced by the inter-linking of factors such as economic growth and investment prospects in the host country (Malaysia).

These include stable political conditions and good economic and financial management as well as conducive investment policies.

The US-China trade war and rising trends of geoeconomic fragmentation have witnessed FDI flows among geopolitically aligned economies that are closer geographically as well as geopolitical preferences.

Throughout the period 2015-2022, China’s gross FDI inflows into Malaysia averaged RM7.5bil per year. Even during the Covid-19 pandemic, China’s economic slowdown did not deter the inflows of FDI into Malaysia (RM7.8bil in 2020; RM8.1bil in 2021; and RM9.8bil in 2022).

In 1H23, China’s gross FDI inflows increased by 25.2% to RM2.1bil though it is likely that the full-year FDI will be below the average FDI inflows of RM8.6bil per year in 2020 to 2022.

China was the largest foreign investor in Malaysia’s manufacturing sector in 2016 to 2022 before dropping to second position in 2022 and the fourth position in 2021.

There was a contrasting picture when it comes to China’s approved investment in the manufacturing sector, which saw two consecutive years of decline (2022: 42.5% to RM9.6bil and 2021: 6.5% to RM16.6bil) and declining further by 17.8% to RM4.3bil in the first quarter of 2023.

We believe that Malaysia will remain one of the preferred investment destinations to China, given both countries’ strong established friendship and bilateral ties in trade and investment as well as people-to-people movements.

Malaysia needs to enhance its investment climate with progressive policies to rival regional peers to offer the country as a China Plus One destination for China and foreign companies.

Malaysia can offer investments to build a chip-testing and packaging factory, advanced manufacturing technologies such as robotics and automation, manufacturing electric vehicle supply chain, petrochemicals, renewable energy, agriculture and food processing.

China can offer the technology, innovation and technical know-how as well as talent that deepen the country’s industry integration with global supply chains and also links Malaysia and China to South-East Asia.

China can invest in Malaysian manufacturing companies to help them adopt advanced manufacturing technologies and further improve their competitiveness.

The RM170bil prospective investments (comprising RM69.7bil from 19 memoranda of understanding and RM100.3bil from the round-table meeting) concluded during the prime minister’s visit to China are set to provide a massive investment boost to our economy for years to come.

Among these are China’s Rongsheng Petrochemical Holdings, which will invest RM80bil to build a petrochemical park in Pengerang, Johor; and investment from Geely, with an initial investment of RM2bil in the Tanjung Malim Automotive Valley, which will gradually increase to RM23bil in the future.

 LEE HENG GUIE is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.

Source link

Related posts:

Recession unlikely for global economy but challenges linger on

China's Rise to Economic Superpower, economy stands out in global arena

Don't worry about China slowdown !

Don’t blame China for global economic jitters; China contributed >25% global growth

Decoding China's secret recipe of success for an economic miracle

Related:

China's manufacturing sector continues to recover in August, enterprises' confidence improves

China's official manufacturing purchasing managers' index (PMI) continued to improve in August, marking the third consecutive monthly increase despite the index remaining in contraction territory.

China to increase financial support for private firms, smooth channels for stocks, bonds, loans

China is set to further increase financial support for private enterprises by introducing measures to lift the proportion of loans to private enterprises, according to the People's Bank of China (PBC), the country's central bank.

US investment curbs on China undermine global division of labor, international economic order: CCPIT

US investment restrictions on key technology sectors in China will undermine industries that are highly dependent on the global division of labor and a free and fair international economic order, China's trade promotion agency said on Wednesday

Raimondo ends 'successful and productive' China visit; sustaining stable ties critical to pave way for possible leaders' meeting in Nov

US Commerce Secretary Gina Raimondo was wrapping up her "successful and productive" four-day high-stakes visit to China on Wednesday, with the visit yielding material results, including the establishment of new communication channels to seek solutions to specific busine

China's growth moving in right direction: official of British Chamber of Commerce in China

China's economy isn't as bad as the prevailing mood suggests and growth is moving in the right direction as consumer spending picks up, said Chris Torrens, vice chairman of the Britis

China cuts down payments, mortgage rates, aiming to further boost sector's sustainable development

China's top financial regulators on Thursday issued a notice to lower down payments for both first- and second-time homebuyers, while further cutting interest rates on existing mortgages, aiming to better meet housing demand and promote the healthy and steady development of the real estate market.

INTERACTIVE: Journey to Merdeka

The ‘Tiger Woods’ act is not for Malaysia

 It's a long road towards being a tiger economy again

A month before the one-year anniversary of Pakatan Harapan’s ruling the government, Malaysia has earned the accolades of being a “boring” and under-performing stock market. The ringgit, which is the thermometer to gauge the economy, has weakened after the initial euphoria of appreciating as high as RM4 against the US dollar.

An economist had said that Malaysia without the Goods and Services Tax (GST) is too dependent on oil revenue. Budget 2019 was based on crude oil at US$70 and considering that the year-to-date average is lower, the country would not be able to keep to spending limits.

Ironically, the story of Malaysia’s being a “boring and under-performing” stock came as golfer Tiger Woods made a remarkable comeback to win his first major tournament since 2008. That was the time when the golfer’s on-course performance started to go downhill due to injuries and “off-course” affairs that led to a broken-marriage.

Sponsors stayed away from Tiger Woods and he lived with a tag as a great golfing talent that never made it. Now he is seen as a role model in the story of triumph against adversity. Woods US Masters win is now repeated as a story of why one must never give up and the fruits of labour will finally pay off.

Sadly, it only applies in the world of sports. In the sporting world, there are clear rules and everybody play within the rules or they are disqualified. Sports world is based on meritocracy. If you good and talented, you would be found - some way or other - even if you live in Borneo.

Sarawak has produced amongst Malaysia’s best sprinter and diver in Watson Nyambek and Pandelela Rinong who proved their worth based on merit.

Running a government to please people with different demands is not so easy. Meritocracy is only a slogan. It reality, it is hard to implement.

For instance, the government’s bail-out of Felda and Tabung Haji are seen as further straining the country’s balance sheet.

The fear that the of Budget 2019 objective of keeping fiscal deficit at 3.4% cannot be achieved considering that the government has to fork out RM6bil to rescue Felda.

However, what investors fail to realise is that the government cannot afford not to bail out the likes of Felda and Tabung Haji. It cannot operate completely on meritocracy and go by the book strictly because there are political considerations to weigh on.

Felda needs to be rescued because of the massive mismanagement of funds. It involves the lives of 120,000 settlers and many more, if their families are taken into account. The Felda settlers are important voter bank and determine 52 parliament seats.

Most of them are Malays who form the bulk of the voting population of the country as a whole.

Whether we like or not, issues that Felda and Tabung Haji face has to be resolved if there is to be any political stability.

The only consolation is that those who are responsible for the mismanagement of Felda, Tabung Haji, 1Malaysia Development Bhd (1MDB) would eventually pay a price.

In communist China, these people would have faced the firing squad.

In Malaysia, it takes time to penalise those responsible under the law. Pakatan Harapan’s messaging to investors is that it provides accountability, transparency and discipline in running the government. It revealed the total debts and a bigger budget deficit for 2019 and left it to investors to decide if they are prepared to put money in the country.

That it does not tolerate corruption is a message that is being drummed countless times.

Is there is a premium in being transparent, accountable and standing firm against corruption? Yes there is. But as a fund manager says, it does not tell investors where to put their money.

It does not tell investors if there is going to be a continuity to the government’s policies and who the next Prime Minister is going to be after Tun Dr Mahathir Mohamad. The fund manager says that Malaysia needs to tell another story, apart from governance and transparency.

Towards this end, a good line of messaging would be on addressing the political transition after Dr Mahathir.

The fund manager is right in his argument because long term capital needs political stability and leadership certainty.

Dr Mahathir, who is named as among the most powerful persons by Time Magazine, probably knows best why he is delaying in setting a firm time table to hand over power to the only person who has been named so far, which is Datuk Seri Anwar Ibrahim.

Probably because the minute Dr Mahathir announces the time-table to handover, he would be a lame duck Prime Minister, a role the 93-year veteran politician would not relish.

Apart from politics, the other matter bogging investors is the slowing Malaysian economy.

The concern is that the economic growth of 4.5% would not be met and that Bank Negara would be forced to bring down the interest rates.

When interest rates are down because of a slowing economy, it dampens sentiments on the ringgit and puts yields of bonds under pressure.

The prospects of a lower yield and weakening currency are just the catalysts needed for bond investors to take some money off the table.

The unfavourable rating by little known Russel Fund Index earlier this week did not help matters. The end result is that the government bonds are under pressure and so is the ringgit.

The government should keep up with doing the things it can best do, which are enhancing transparency, governance and being more careful in handling public funds. Investors will view with scepticism until they see hard numbers on the economy and consistency in growth.

The Malaysian stock market was among the world’s best in 1993 on the back of a roaring economy that started its growth path some four years earlier.

The economy over-heated, the government got carried away with spending and we paid a heavy price by the ringgit and stock market crashing. It all came down with a thud in 1997.

The Pakatan Harapan government wants to see Malaysia be a “tiger economy” once again.

But it would not be easy. The road ahead is treacherous with lots of obstacles – balancing the demands of the political and social agenda.

We cannot do it the Tiger Woods way because there is no meritocracy when it comes to governing a country. But we will get there eventually as long as we stay the course.

The Alternative view by M Shanmugam

Related posts:

 

FELDA WHITE PAPER reveals SHADY DEALS

 

More big corrupt officials nabbed: Datuk among those busted for graft & mismanagement

 

PAS left in a state of confusion, the only way is to lie

  

 

 

How Tabung Haji became an unregulated ‘bank’

Obscene HRDF, skill training for corruption !

 

Govt-linked companies (GLCs) shake-up as they sing a different tune