China’s Economic Woes

What impact will China’s economic slowdown have on developing markets?

As China is facing the specter of an economic slowdown, developing economies may also have to deal with the secondary effects of its economic problems.

In the summer of 2023, economic watchdogs and media noted unmistakable signals of an imminent economic slowdown in China.

Though the reasons are not fully understood, China’s economy has began to stall after a good start in 2023. The Chinese yuan is at a fifteen-year low; exports are taking a nosedive; and unemployment—especially among the youth—is reaching alarming levels.

“Global investors have already pulled more than USD10 billion from China’s stock markets, with most of the selling in blue chips,” according to Time Magazine.

China’s economic growth is bound to plunge to under 5% for the first time in a very long time. Even during the financial crisis of 2008, the Chinese economy did better than that.

Much has been said over the last couple of weeks about how will China likely face this challenge with the help of a stimulus package, among other measures. Much remains to be said, however, about the impact of the Chinese economy’s stalling on the rest of the world.

A slowdown in the world’s second largest economy will certainly come with consequences for the rest of the world, especially those developing economies which rely on China in terms of financing and technology transfer.

The most obvious secondary consequence of China’s economic woes for developing economies will be a slump in Chinese investments.

China is one of the leading sources of foreign investment in Africa, developing parts of Asia, and Latin America. “China’s overall outward direct investment (ODI) reached USD146.5 billion in 2022, up 0.9% year-on-year (YOY),” according to Ernest & Young.

The country’s Belt and Road Initiative, meanwhile, has channeled billions of dollars in financing toward infrastructure projects in 150 developing countries, from Indonesia to Chile and—though it may sound difficult to believe—every single country across the continent of Africa.

With less funds to spare, China may decide to cut down on outward investments.

Nevertheless, it is not certain that China will soon put all its overseas investments on hold—at least, Beijing does not wish to communicate such a message.

During a recent visit to Jakarta, Chinese Premier Li Qiang “pledged USD21.7 billion in new Chinese investment in Indonesia to strengthen the countries’ economic and political ties,” reported PBS News on September 8, 2023.

Then there is the issue of exports to China. Several developing countries rely on foreign exchange revenues they make through the export of minerals and raw materials to China, as the country’s mighty industrial machine is always in need of raw materials to turn into exportable products.

Iron ore from Brazil, coal and palm oil from Indonesia, copper from Chile, among a dozen more raw materials, are essential to keep Chinese manufacturing industries active.

A drop in demand from China can be alarming for the exporters of such materials.

On the plus side, however, curbed growth in China is almost always accompanied with a drop in oil prices, as China is the number one importer of crude oil in the world. With less industrial activities in China, the global demand for oil will go down.

This, in turn, will lead to lower energy prices in global energy markets, which can stimulate local growth in developing economies, making up for some of the lost opportunities.

By Babak Babali