A slowdown in the Chinese economy has raised concerns about its impact on the global economy, potentially pushing countries into recessions, but companies in the US and Europe are anticipated to feel less impact.
A recent report by S&P Capital IQ, titled “China’s Trading Partners Have Nowhere to Hide As Growth Slows,” notes two key changes relating to China’s trade that are profoundly impacting the Asia-Pacific region and beyond. The first is China’s largely completed efforts to bring its companies’ supply chains onshore, reducing Chinese manufacturing imports and especially hitting industrialized economies such as Japan, South Korea, Taiwan and other parts of the Asian supply chain.
“As China moved up the value chain, it was increasingly able to produce these components onshore,” said Vince Conti, an economist at S&P Capital IQ. “This reduces China’s demand for intermediate goods imports from external suppliers in the aforementioned economies for any given rate of GDP growth.”
The second change is the slower and hopefully more sustainable GDP growth in China, a more structural change that will slam the country’s commodity suppliers but impact less severely providers of final products, such as retail and capital goods. The slowdown is bound to hurt some providers of goods and services to China, although demographic shifts are likely to generate demand for others. Caterpillar, for example, recently cut its full-year forecast, but noted that sales in China were up 20 percent in the second quarter over the same period in 2014.
The report notes languishing export growth in Asia-Pacific “tiger” economies, which are major manufacturing exporters to China and tend to be leading indicators of an export rebound in the region. One cyclical explanation is the sluggishness of the global economy, perhaps operating with some lag, suggesting export growth should return to normal as the global recovery continues.
The structural explanation is more pessimistic and suggests that the pattern of global production has changed as the world’s two largest economies, the US and China, continue to onshore the production of items they used to import.
“Our take is that the structural story has moved from risk to reality,” the report says.
Whether companies providing retail and capital goods give more credence to the cyclical or structural explanations could play a significant factor in the budget rates they are beginning to set for 2017. While Caterpillar continues to see long-term growth prospects for its heavy equipment and mining equipment in China, especially as China’s rural population continues to move into cities, other sellers of capital goods may see less demand.
Nevertheless, said Mr. Conti, there are few countries with high direct exposure to a drop in Chinese demand for capital-goods imports, noting that South Korea may be the hardest hit, given 15 percent of its exports are capital goods destined for China. The corresponding share for Japan and the Philippines is 9 percent each, and for the US and Europe it is less than 5 percent each.
“This suggests that at the country-aggregated level, capital goods exporters outside of the Asian countries listed above are diversified enough in terms of demand sources to avoid hard first-round impacts from an investment-led China slowdown,” Contie said.
A dramatic shift in the Chinese renminbi’s value relative to the US dollar or Euro could shift these dynamics, but S&P says the RMB is unlikely to depreciate significantly given it is still heavily managed by a central bank that prefers stability and has the largest foreign-exchange reserves.
“External demand remains the main determinant of Asian exports, not exchange rates,” Mr. Conti said. “And China’s trade-weighted exchange rate is still significantly stronger than it has been in recent years.”