China’s 2018 full-year GDP of 6.6% turned out to be the slowest pace since 1990 versus 6.8% in 2017. It was marginally higher than our projection of 6.5%. Slower growth was highly anticipated following the impact from the ongoing trade dispute with the US, its largest trading partner.

Even before the increased trade tensions with the US, the Chinese economy was already trying to manage a slowdown. So, growth in 2019 will be driven from domestic demand, supported by consumption and tax cuts, added with injecting liquidity into the system by reducing the reserve required ratio. Besides, growth will be supported by the services sector that has strengthened slightly. Hence, the GDP in 2019 is likely to be around 6.2%.

However, China’s growing importance as a market for exports from its Asean neighbours has increased their vulnerability to a Chinese economic slowdown. The impact of the slowdown in China’s manufacturing sector would hurt East Asian manufacturing supply chain.

Looking at Malaysia, with around 13% of total exports exposed to China, the economy will potentially get hurt if the Chinese economy slows down fast. In particular will be our manufacturing sector where around 80% of our total exports to China are manufactured goods — the E&E industry accounts for around 43% of our exports to China, making it particularly exposed to any shock waves from China.

• China’s 2018 full-year GDP of 6.6% turned out to be the slowest pace since 1990 versus 6.8% in 2017. It was marginally higher than our projection of 6.5%. Slower growth was highly anticipated following the impact from the ongoing trade dispute with the US, its largest trading partner.

• In 4Q2018, the GDP grew 6.4% y/y from 6.5% y/y in 3Q2018. Nonetheless, there were a few bright spots partly supported from the export front loading. Industrial output expanded 5.7% y/y in December from 5.4% y/y in November. Retail sales rose 8.2% y/y in December from 8.1% y/y in November.

• Even before the increased trade tensions with the US, the Chinese economy was already trying to manage a slowdown. So, growth in 2019 will be driven by domestic demand, supported from consumption and tax cuts, added with injecting liquidity into the system by reducing the reserve required ratio. Besides, growth will be supported by the services sector that has strengthened slightly.

• Meanwhile, the authorities are trying to balance between high debt levels and maintaining economic growth. While reducing the reliance on debt is positive on the economy in the long run, it will mean slower growth in the near term, Hence, the GDP in 2019 is likely to be around 6.2%.

• The rapid growth of the Chinese economy over the last decade has resulted in China’s share of the world’s GDP rising from 5% in 2005 to an estimated 17% in 2018. It has made China an increasingly important export market for most Asean countries, including Malaysia, as well as a key engine for world growth. Exports from Asean to China have grown at a pace of approximately 12% a year over the last decade.

• However, China’s growing importance as a market for exports from its Asean neighbours has increased their vulnerability to a Chinese economic slowdown. The impact of the slowdown in China’s manufacturing sector would hurt East Asian manufacturing supply chain.

• Looking at Malaysia, the economy has been a significant beneficiary from China’s economic ascent over the past decade with an export exposure of around 13% of total Malaysian exports. Unlike many other East Asian economies, Malaysia has been relatively resilient to China’s economic slowdown so far. However, with Malaysia’s significant exposure and the risks of a prolonged China slowdown, it will result in a significant downside risk to the economic outlook, especially on Malaysia’s manufacturing sector. It is because around 80% of total Malaysian exports to China is manufactured goods. In particular, the E&E industry accounted for around 43% of our exports to China, making it especially exposed to any shock waves from China.

Source: AmInvest Research - 22 Jan 2019