How would an economic slowdown in China affect emerging markets?

– China’s growth rate dropped to 4.9% year-on-year in the third quarter

– Concerns about the impact a slowdown in China could have on emerging markets

– Many ASEAN and African countries generate large proportions of their GDP from exports to China

– Trade diversification could help bolster economic security

A major driver of global trade, China’s economy has recently experienced a slowing of growth, giving rise to concerns about possible negative impacts on emerging markets.

China’s economy grew by 4.9% year-on-year (y-o-y) in the third quarter, the National Bureau of Statistics reported on October 18, significantly below both the 7.9% y-o-y recorded in the second quarter and the expected full-year expansion of 8%, as forecast by the IMF.

A key factor behind this disappointing performance was a series of power shortages, which had an impact on industrial output across the country: many factories were forced to stop production in late September as a surge in the price of coal led some power producers to reduce output.

Compounding these issues, the global shortage of microchips has affected the production of electronics and vehicles, both in China and globally, as OBG has detailed.

In addition, concerns related to the Chinese real estate industry – which, together with related industries, accounts for around one-quarter of China’s GDP – have also affected investment and confidence in the broader economy.

Over the course of September and October real estate giant Evergrande missed a series of offshore bond payments, and may default this week.

Similarly, fellow Chinese real estate firm Sinic Holdings has warned that it is unlikely to repay $250m of offshore bonds due later this month, and China Properties group has defaulted on $226m worth of notes.

Ripples to be felt across Asia

Given that China is the world’s second-largest economy and deeply embedded within the global economic system, any slowdown could have significant effects for emerging markets around the world.

Those markets whose exports to China account for a significant proportion of GDP stand to be the most affected. For example, Mongolia derives almost half of its GDP from exports to China, while in Taiwan the total is around one-third.

Another country that could be affected by a sustained economic downturn in China is Vietnam, which has recorded strong growth over the past decade largely on the back of an expansion of trade with its northern neighbour. The country exported $48.9bn in goods to China last year, according to UN agency Comtrade, making up around 20% of its GDP.

Roughly half of these exports consisted of electrical and electronic equipment, as Vietnam is a major exporter of smartphones, computers and electrical parts to its neighbour.

The situation is similar in Malaysia, which last year exported around $38bn worth of goods to China, an estimated 20% of its total trade. Once again, much of this consisted of parts used in the production of smartphones, cars, computers and home appliances – sectors that would suffer if current problems persisted.

Aside from strictly product-based trade, an economic slowdown in China could also affect the number of outbound Chinese tourists. This would potentially limit the number of arrivals in South-east Asia, where, as OBG has recently covered, a number of countries have begun loosening border restrictions in the hope of triggering a rebound in the sector.

Africa’s strong relationship with China

The effects of any prolonged Chinese slowdown would be felt far beyond South-east Asia.

In recent years China has developed strong trading relationships with a number of African countries, many of which export large amounts of natural resources necessary for China’s industrial expansion, such as minerals, metals and oil.

Angola is the continent’s largest exporter to China, shipping around $23bn worth of goods in 2019, principally mineral fuels and oils.

However, a slowdown in China’s economy, and in particular its industrial sector, could affect countries such as the Republic of the Congo, Namibia and the Democratic Republic of the Congo, all of which derive between 15% and 20% of their GDP from exports to China.

Trade diversification is key

Although China is an important trading partner for many emerging markets, a number of countries have successfully developed diversified export economies in recent times.

The need for a diversification was brought sharply into focus by the pandemic, which disrupted a large number of the world’s supply chains, many of which were closely linked to China.

As a result, many businesses and governments pursued a so-called China+1 strategy, whereby they seek to diversify production capacity by setting up factory lines in other countries, while maintaining significant operations in China.

Given their geographic proximity to China, developed industrial sectors and competitive labour costs, ASEAN countries such as Indonesia, Thailand and Vietnam have already begun to benefit from this shift and report high levels of export diversification.

In Africa, while a number of countries have strong trading relationships with China, the recently launched African Continental Free Trade Area (AfCFTA) is expected to boost trade diversification by dramatically increasing intra-African trade.

The AfCFTA agreement requires members to remove 90% of tariffs on goods, facilitate the movement of capital and people, and take steps towards creating an Africa-wide Customs union, which proponents say would significantly boost regional trade – an area with significant growth potential.