How Would China's Slowdown Hit Various Countries? It's Complicated

 | Mar 24, 2017 | 8:00 AM EDT
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The Chinese economy's growth has been slowing for a while, and this deceleration seems to be structural in nature. As the country rebalances away from rapid industrialization towards an economy that relies more on consumption and services, its many trading partners are likely to suffer.

It is difficult to quantify how much and which countries will be hit the hardest. An economy as complex as China's, which is the world's manufacturer of choice, imports goods both for domestic consumption and for use in the products it then sells on to the world. Therefore, it doesn't necessarily follow that a fall in demand in China would automatically translate into an equal deceleration of imports.

A working paper for the Asian Development Bank Institute, published recently, looks at the countries that are most dependent on exports to China. At first glance, it appears easy to see which countries could suffer most. Malaysia's exports to China are 16.8% of its GDP, South Korea's are 11.2%, Thailand's 9.9%, Singapore's 9.1%, Philippines' 7.4%, Saudi Arabia's 5.9%, Australia's 5.4%, Japan's 3%, Indonesia's 2.8%, Switzerland's 2.6%, Germany's 2.5% and Brazil's 2%.

Taiwan, which is called Chinese Taipei by China in recognition of the One China policy, tops the list with 20.5%.

However, delving deeper into the data shows that some countries are more exposed to China than one might think, when judging by the so-called gravity model -- an evaluation model for bilateral trade flows based on geographical distance and economic size.

The results of the paper, whose author is Willem Thorbecke, a senior fellow at the Research Institute of Economy, Trade, and Industry, indicate that some countries on the list have exceeded the predictions of such a model, while others have come short. They look very different from the list of countries based on exports to GDP.

Judged by the gravity model comparison applied to trade flows in 2014, Australia's exports to China were $71 billion more than expected, Germany's were $55 billion more than expected, Brazil's were $44 billion, Saudi Arabia's $29 billion and Taiwan's were $28 billion more than expected. The model also shows South Korea, Indonesia, Malaysia and Japan in fact exported less than predicted.

Looking at the data at different points in time, the picture changes slightly. Every single year since 2008, exports from Germany, Australia, Brazil, Saudi Arabia and Taiwan have largely been positive outliers. However, the data show that between 2009 and 2013, exports from Japan, Malaysia, Indonesia and Thailand to China had also been more than predicted.

The picture changes again when looking at what these exports actually represent. For the Asian countries, the share of electronic products relative to total exports ranges from 33% for Thailand to 60% for the Philippines. This indicates that one reason why Asia's exports to China are so big is the fact that China is part of the regional electronics value chain.

Commodities make up the bulk of exports to China for Australia, Brazil and Indonesia, while for Saudi Arabia crude makes up 77% of exports. For Germany, goods related to the auto industry make up more than 30% of exports, with machinery, capital goods and machine tools also taking up a large share. Japan's exports seem to be well diversified, with no particular sector making up more than 10%.

While China's Asian neighbors are heavily exposed to a potential slowdown in the world's second-largest economy, it is clear that countries as far away as Europe and Latin America could be more at risk than previously thought. Investors should particularly keep an eye on those countries whose exports are not diversified enough: A slowdown could be a major destabilizing factor for them.

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