The latest news from China hasn’t been great, but some context is needed. An obsession with industrial data obscures the fact that China is now an economy in which the service sector accounts for a bigger part of gross domestic product (or GDP) than manufacturing. Even now, non-manufacturing Purchasing Managers Index (or PMI) numbers show expansion as China slowly restructures towards domestic consumption.
We believe the economy is growing around 5% to 6%, which is less than the official government number but still puts rivals in the developed world to shame. We also think Chinese policymakers have not hit the panic button, as has often been suggested, because the weaker renminbi since mid-August just represents another step in currency liberalization, not just a currency devaluation to make exports more competitive.
What does this mean for Asia? It’s a mixed bag: if the Fed were to remove one source of uncertainty by raising interest rates before the end of this year, more capital is likely to flow away from the region. Even then the pace and direction of interest rate adjustments may remain unclear.
China’s slowdown will remain a concern for the foreseeable future. That’s a problem for those Asian economies, such as commodities exporters Malaysia and Indonesia that rely on Chinese demand. There will be fewer Chinese tourists venturing overseas, out-bound investment from China will be affected and Chinese domestic consumption will moderate.
Market Realist – Should you be worried about China?
A good percentage of the world’s exports end up in China (GCH)(MCHI). The graph above shows the shares of exports for each country going to China in 4Q14. As you can see, Australia (IAF) is very dependent on Chinese demand. About 32% of Australian exports go to China. A lot of Asian (FAX) economies, including South Korea, Japan (JEQ), and Indonesia (IF), also heavily depend on China for exports. China was responsible for close to 27% of Korean exports, which are mainly electronics and automobiles.
So a further slowdown in China could hurt these economies. Some commodity-oriented economies, like Russia and Brazil (LAQ), have already entered recession territory.