Economic Update

Published 26 May 2022

– China’s “zero-Covid” strategy is limiting output and suppressing consumer demand

– The slowdown is also weighing on demand in countries that export to China

– Commodities exporters have remained comparatively resilient 

– There is the opportunity for emerging markets to fill gaps in global supply chains

With China’s economy slowing on the back of a strict Covid-19 containment strategy, there are concerns about the effects this might have on several emerging markets.

Since the beginning of the year Chinese authorities have implemented a series of lockdowns and curfews, including in major cities Beijing and Shanghai, to help combat a spike in coronavirus case numbers. The widespread measures have included restrictions on movement for individuals, as well as the closure of restaurants and other face-to-face businesses.

While this so-called zero-Covid strategy is helping to contain the spread of the virus, the strict lockdowns and curfews are having an impact on Chinese consumer demand and manufacturing output.

According to year-on-year (y-o-y) figures for April, retail sales fell by 11.1%, industrial production by 2.9% and manufacturing by 4.6%. Meanwhile, the Chinese yuan and the MSCI Emerging Markets Currency Index both fell in tandem in April.

In terms of the broader economy, in March Chinese officials set a GDP growth target of around 5.5% for this year, the lowest official target for three decades and well down on the nearly 10% average annual growth the country has enjoyed for four decades. Highlighting how difficult even this figure may be to achieve, in early May ratings agency Fitch downgraded its full-year outlook for China to 4.3%.

Effect on emerging markets

A Chinese economic slowdown, particularly in the industrial sector, could pose challenges for emerging markets, especially those that export a significant amount of goods to China or who rely on Chinese manufacturing inputs.

For example, Mongolia sent 48.2% of its exports to China in 2019, the most of any country. Taiwan was second at 33.5%, followed by Vietnam (22.6%), Singapore (20.7%), the Republic of Congo (18.7%), Oman (16.7%) and Namibia (16%).

Highlighting its significant position in global trade, China accounted for roughly 12% of all global imports in 2021, although this figure is far higher in specific sectors. In 2019 China imported 24.5% of the global trade in electronics, 16.4% of minerals, 11.4% of machinery and 10.5% of agriculture, most of which came from emerging markets.

With China’s Covid-19 strategy suppressing demand for imports of foreign goods, the effects are being felt across Asia.

Taiwan’s manufacturing production, which had boomed from the middle of 2020 to the end of 2021 on the back of sales of electronics components, slowed in the first three months of 2022. Covid-19-related plant disruptions at Taiwanese firms in China in April are expected to further dampen production.

Meanwhile, Thailand has downgraded its own growth forecast by one percentage point to 2.5-3.5%, citing the challenges of a slowdown in China and the ongoing effects of Russia’s war in Ukraine.

Resilient raw materials

Commodity-rich emerging markets are somewhat less impacted by curtailed domestic demand in China and a shortage of manufacturing inputs. China relies on raw minerals and energy from many of these markets, and demand remains relatively robust.

The Democratic Republic of Congo is the largest exporter of cobalt, and China is the largest importer. Global cobalt prices fell 6% in April due to the curtailment of China’s cathode production during the lockdowns, but electric vehicle manufacturers are optimistic that sales will catch up later this year.

Namibia, which exports large quantities of copper and uranium to China, has not experienced any significant dips so far this year.

Meanwhile, oil prices remain high, buffeting concerns from oil-exporting countries like Oman and Kuwait.

The importance of the energy transition and concerns about energy security mean that emerging markets that export either the minerals needed for manufacturing clean-energy technologies or traditional hydrocarbons are only expected to experience minor disruption from a slowdown in China.

Yet, if other global macroeconomic forces like inflation and mounting debt service requirements continue to gain steam, demand for oil and other raw minerals could soften in the medium term.

Opportunities for trade and investment

While China’s slowdown has undoubtedly brought about some challenges for emerging markets, it has nevertheless created some potential opportunities for several countries.

Indeed, although the economic slowdown has impacted China’s demand for imports, the closure of factories has also affected exports, with export growth slowing to 3.9% y-o-y in April, down from 14.7% in March.

This could present emerging markets with opportunities to fill the attendant gaps in global supply chains.

For example, despite China’s slowdown, Myanmar and the Philippines saw exports hold steady or even rise in recent months, thanks to demand from other markets, including the US.

Meanwhile, Malaysia experienced greater domestic demand in recent months thanks to the relaxing of Covid-19-related restrictions. Palm oil exports also rose as neighbouring Indonesia, a top producer, banned exports shipments last month due to rising prices for its citizens.

Although these economic indicators have been reasonably positive, a prolonged downturn in China’s economic situation could pose a risk to Malaysia, given the two countries’ strong trading partnership.

Aside from capitalising on the downturn in Chinese export growth, a number of emerging markets could benefit from the current situation by attracting more investment.

Since the initial pandemic-related supply chain disruptions in 2020, many businesses and governments have pursued a so-called China+1 strategy, diversifying production capacity by setting up in other countries while maintaining significant operations in China.

Perhaps no country is better placed to benefit from the situation than Vietnam, which has taken major steps in recent years to attract foreign investment and provide a regional manufacturing and supply chain alternative to China.

While undoubtedly affected by the disruption of inputs from China, these investments of recent years and increasing exports to the US and other markets have helped stabilise the economy.

Vietnam’s GDP expanded by 5.03% y-o-y over the first three months of the year, only down slightly from the 5.22% growth recorded in the previous quarter. Meanwhile, the country’s manufacturing output has held largely steady over the first four months of 2022.