January 26, 2024
PETALING JAYA – With many economists foreseeing a continued deceleration of economic growth for three of Asia’s largest economies, namely China, Japan and India, it is interesting to see how this could affect Malaysia’s gross domestic product (GDP) expansion.
Early last week, chief Asia economist for the HSBC Global Research team Frederic Neumann predicted a slowdown in growth for the two most populous nations as well as Japan alongside Europe and the United States, though concurrently he foresees an acceleration for smaller economies including Asean.
Understandably, with China having been Malaysia’s largest trading partner since 2009, it is obviously perceivable that any prolonged slowdown for the Middle Kingdom will affect Malaysia’s economy, which itself has been primarily propped up by domestic demand since the end of the lockdowns.
Socio-Economic Research Centre executive director and veteran economist Lee Heng Guie told StarBiz that investors remain concerned about the continued stress in China’s real estate sector.
As a result, he said a sharp slowdown in China’s economy will impact Malaysia’s exports and could dampen outward investment from Chinese companies to the country.
“Given the persistently uneven global growth amid the lagging impact of higher interest rates on the US economy, China’s slowdown will add to global uncertainty as it consumes less and reduces direct investments,” he opined.
Consequently, Lee observed that the Chinese authorities have implemented monetary and fiscal policies to avert a prolonged economic slowdown, while being at a crossroads of having to consider a multitude of economic risks.
“Consumer and producer prices are falling but the real estate stress is still on the mend, with local governments and property developers still struggling with high debt,” he noted.
His 4.6% GDP growth projection for China in 2024 is close to Neumann’s 4.7%, and is predicated upon the continued expansion of the global economy, which most importantly would help to revive exports and bolster China’s approval of a one trillion yuan sovereign bond issue.
On top of that, he said the Chinese government has also implemented other measures aimed at bolstering the economy including technological innovation in the industrial system, stimulating domestic consumption and expanding high-level foreign investment.
Meanwhile, Coface Hong Kong north Asia economist Tan Junyu concurred that the services-led nature of China’s post-reopening recovery has clearly disappointed regional trade partners, including Malaysia, as total exports to China has plunged by 10.4% in dollar terms from January to November last year.
He told StarBiz that the main dragging factors were electronics, palm oil-related products as well as iron and steel, accounting for a combined 91% of the total decline and contributing a reduction of 5.2 percentage points (ppt), 2.7 ppt and 1.6 ppt, respectively.
“While the decrease in exports for the former two was partly attributable to global electronics downturn and the annual decline in oil prices, the decline in construction metals exports was likely a consequence of the subdued property investment demand in China,” he said.
On the other hand, like many do, he believes the reciprocal visa-free programme between Malaysia and China effective from last December could lend some hope to tourism income.
This is even more crucial judging from the fact that for the first nine months of last year, the volume of Chinese visitors had only recovered to 43% of the pre-lockdown level, as Tan estimated that a full return of Chinese tourists could help lift Malaysia’s GDP growth by 0.4 ppt.
He is anticipating China’s economy to grow by 4.3% year-on-year in 2024, noting that while it had gathered some footing in the second half of last year, the recovery remained bumpy with no signs of relief from the housing sector.
Tan’s colleague Nouri Chatillon, economist for Asia Pacific at Coface, opined that Malaysia will certainly benefit from forging more trade links with other countries, especially given the uncertainties associated with a potential China economic downturn.
He said relying heavily on the Chinese market, which is the second-largest recipient – after Singapore – of Malaysian exports at 13.5% in 2023, is precarious.
This is even more essential considering the predominant role of electronic products which constituted approximately 43% of Malaysia’s exports to China last year, especially in the context of the US-China trade rivalry, he added.
“The US ‘CHIPS Act’, targeting semiconductor development in China, accentuates the need for Malaysia to broaden its trade partners to ensure compliance with evolving and potentially tightening US export policies,” Chatillon emphasised.
The CHIPS Act, first passed in US Congress in Aug 2022, is designed to promote the return of semiconductor manufacturing that is presently concentrated in Asia to the United States, by offering a menu of subsidies, tax credits and domestic content rules that encourage onshore US research, development and manufacturing.
In addition, Chatillon said expanding trade partners will help Malaysia to mitigate geopolitical risks and uncertainties, especially since the country engages in various Free Trade Agreements (FTAs), notably as a member of the Regional Comprehensive Economic Partnership (RCEP) comprising major Asian nations and Asean, which covers about 30% of global trade.
He said while Malaysia has also been part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership since October 2022 and expanded ties to countries like Mexico, Canada and Peru in the process, the government could explore other trade relations, especially with the European Union (EU).
“In 2023, the EU contributed 7.9% to Malaysia’s total exports. Ongoing negotiations such as the Malaysia-EU FTA and the Malaysia-European FTA Economic Partnership Agreement hold the potential to tap into the significant demand from Europe and enhance Malaysia’s global trade presence,” he said.
Nevertheless, Chatillon acknowledged that China’s substantial consumer market, representing 17.5% of world population, and its 18% share of global GDP in 2023, underscores its importance as an export destination.
He recognised that despite the potential challenges stemming from China’s economic downturn, the difficulty of disengaging from China is evident.
“Also, shifting away from well-established supply chains may impact short-term business profitability and the move might strain diplomatic ties, risking the positive relationship with Beijing,” he said.