Event Highlights

• This week marks China's most significant political event of the year as Beijing hosts the National People's Congress (NPC), the nation's preeminent legislative body. Commencing on Tuesday, 5 March 2024, this assembly coincides with the Chinese People's Political Consultative Conference, a prominent advisory body that initiated proceedings a day prior. The impressive weeklong gatherings unfold within the grandeur of the Great Hall of the People, situated on the western expanse of Tiananmen Square. China, holding the position of the world's second-largest economy, exerts a pivotal influence on the global economic stage. The recent unveiling of China's economic targets for 2024 serves as a window into the nation's key priorities, imminent challenges, and potential opportunities.

• Here are the salient highlights we have gleaned:
   
  • Growth Targets and Economic Realities: China's growth target for 2024 is set at "around 5%," following a 5.2% growth in the previous year. Despite the optimism target, it is crucial to acknowledge the headwinds faced by China's economy, particularly in the real estate sector and export demands.
     
  • IMF Projections and Concerns: The International Monetary Fund (IMF) predicts a 4.6% increase in China's GDP, citing a real estate slump and weaker export demand as potential impediments. The medium-term challenges of weak productivity and an ageing population also add to the concerns, suggesting a need for sustained reforms to ensure stable and sustainable growth.
     
  • Deficit Management: China aims to maintain a deficit-to-GDP ratio of 3%, down from a revised 3.8% last year. This adjustment reflects the government's commitment to fiscal discipline while addressing the economic challenges.
     
  • Spending on Defense: The Chinese government intends to boost its defence budget by 7.2%. This rate of increase mirrors that of the previous year, marking the ninth consecutive year of single-digit growth in defence expenditure.
     
  • Strategic Bond Issuance: China plans to issue CNY1.0tn in "ultra-long" special treasury bonds to fund major projects aligned with national strategies. The most recent one was in 2020 when authorities issued the same amount of those bonds to pay for pandemic response measures. Additionally, CNY3.9tn of special-purpose bonds for local governments will be issued, signalling a commitment to infrastructure development and economic stimulus.
     
  • Employment and Inflation Targets: China's targets for 2024 include an urban unemployment rate of around 5.5%, the creation of 12mn new urban jobs, and a consumer price index increase of around 3%. These targets align with the goals set for the previous year, emphasising stability in employment and inflation.

Persistent Real Estate Challenges: China acknowledges the challenges in the real estate sector, a key driver of economic growth. The government pledges to meet financing demands from real estate enterprises while addressing local government debt risks. The interconnected nature of real estate troubles and local government finances requires a comprehensive approach to mitigate risks.

Risk Mitigation and Financial Stability: Beijing is committed to building long-term mechanisms for preventing and controlling risks. Measures to defuse existing debts, guard against new debts, address risks in small and medium financial institutions, and combat illegal financial activities demonstrate a proactive stance towards ensuring financial stability.

Possible Implications for Malaysia

• Real GDP: It is crucial to acknowledge that the correlation between China's GDP and Malaysia's economic performance is a complex interplay influenced by various factors, rendering the relationship dynamic. Economic conditions, policy decisions, global trade dynamics, and geopolitical factors shape the impact of China's GDP growth on Malaysia. Our observations indicate that statistically, the correlation between Malaysia and China's GDP from 2010 to 2019 (pre-COVID) was relatively strong at 63.4%.

• However, a shift in the correlation, down to 20% for the period of 2010-2023, signals a change in the economic dynamics and relationship between the two countries. External shocks, particularly the divergent impacts of the COVID-19 pandemic on Malaysia and China, have likely contributed to this altered correlation. As we transition from the pandemic into a normalisation phase, there is a belief that the correlation may rebound to its optimal level. This suggests that Malaysia's economic fortunes remain intricately tied to China, emphasising the importance of closely monitoring and adapting to the evolving economic landscape for both nations. As the global situation stabilises, the potential resurgence of a stronger correlation underscores the interdependence between Malaysia and China.

• Trade Impact: Changes in China's economic growth and trade policies carry direct ramifications for Malaysia. A potential slowdown in China's economy poses the risk of diminishing demand for Malaysian exports, impacting critical sectors such as electronics, palm oil, and natural resources. Notably, as of 2023, China accounted for approximately 17.1% of Malaysia's total trade, with exports to China constituting 13.5% and imports from China comprising 21.3%.

• The Malaysia-China economic partnership stands as essential for Malaysia's economic trajectory. The robust exchange of goods, investments, and collaborative endeavours spanning various sectors underscores the significance of this bilateral relationship. In navigating the evolving global economic terrain, nurturing a dynamic and resilient partnership becomes imperative to capitalise on emerging opportunities and foster mutual economic development.

• The economic well-being of China, mirrored in its GDP growth, intricately influences Malaysia's export-oriented sectors. A flourishing Chinese economy typically translates to heightened demand for Malaysian exports, thereby positively contributing to Malaysia's overall economic performance, and vice versa.

• Investment Fluctuations: Generally, shifts in China's investment priorities or economic policies have the potential to impact the extent of Chinese Foreign Direct Investment (FDI) in Malaysia. Businesses in Malaysia with investments in China may also feel the effects of alterations in the Chinese business landscape. As of the fourth quarter of 2023, Malaysia's FDI rose to RM926.3bn, compared to RM914.9bn in the third quarter of the same year. However, China holds the seventh position, contributing 3.7% or RM34.5mn of the total FDI in Malaysia. This figure is notably lower than Singapore (RM207.7mn), Hong Kong (RM113.3mn), and the US (RM97.4mn), which stand at 22.4%, 12.2%, and 10.5%, respectively, according to data from the Bank Negara Malaysia.

• It's evident that China's economic performance wields influence over FDI flows, and Malaysia, as a recipient of Chinese investment, is susceptible to such influences. Alterations in China's GDP growth can resonate through investment decisions, particularly impacting sectors like real estate, manufacturing, and infrastructure in Malaysia. Staying vigilant to these dynamics is crucial for Malaysian businesses and policymakers, allowing them to adapt strategically to changes in the global economic landscape and safeguard the interests of both nations.

• Tourism: Malaysia is fervently aiming for a recovery in tourism, given its substantial contribution of approximately 14% to the overall economy in 2022, as reported by the Department of Statistics Malaysia (DOSM). However, the revival is contingent on various factors, with changes in China's economic conditions looming as a potential influencer. Any slowdown or currency fluctuations in China could reshape the travel patterns of Chinese tourists, thereby impacting Malaysia's tourism industry, which has traditionally enjoyed a significant influx from China.

• Tourism Malaysia reveals that, in 2023, Chinese tourists numbered 1,474,774, making China the fourth-largest source of tourism for Malaysia, following Singapore, Indonesia, and Thailand. The encouraging outlook from China, often correlated with its GDP growth and the resulting spending power of Chinese tourists, holds promise for Malaysia. A thriving Chinese economy typically stimulates increased outbound tourism, indirectly benefiting countries like Malaysia that attract a considerable number of Chinese visitors. To note, China’s tourist receipt back in 2019 was the second highest (behind Singapore) at RM15.32bn,

• Conversely, an economic slowdown in China might lead to a downturn in Chinese tourism, subsequently affecting Malaysia's tourism sector. As Malaysia endeavours to rejuvenate its tourism industry, it remains essential to closely monitor and adapt to the fluctuations in the global economic landscape, particularly those originating from China, to ensure a resilient and sustainable recovery.

• Currency: The connection between the Chinese yuan (CNY) and the Malaysian Ringgit (MYR) delineates the relationship and interactions between these two currencies within the foreign exchange market. Their correlation stands at approximately 60%, indicating a notable positive correlation. In practical terms, this suggests a tendency for the yuan and ringgit to move in the same direction. When one currency experiences a strengthening or weakening, the other is likely to follow suit.

• However, this positive correlation also brings about shared risks. Unexpected events or economic changes affecting one currency may have corresponding impacts on the other. This underscores the importance for investors and businesses to carefully assess the potential benefits of diversification against the risks inherent in a positively correlated environment. While correlation is a pivotal metric, it should not be isolated from other factors. Complementary elements, including economic indicators, central bank policies, trade balances, and geopolitical events, contribute to the broader narrative of currency movements. Our Thoughts

• In summary, the economic ties between China and Malaysia are multifaceted, spanning trade, investment, and tourism. The impact of any shifts in China's economic landscape, whether positive or negative, is likely to reverberate in Malaysia. Therefore, it is imperative for Malaysian policymakers, businesses, and investors to remain vigilant and well-informed about developments in China, adapting their strategies accordingly. The intricate and interdependent nature of the economic relationship between these two nations underscores the importance of staying abreast of evolving conditions in the global economic landscape, ensuring a proactive and resilient approach to navigating the dynamics of this crucial partnership.

• China's ambitious growth target for the year stands prominently, surpassing the forecasts of esteemed organisations such as the IMF (4.6%), World Bank (4.6%), and the OECD (4.6%). This ambitious aim, although slightly tempered compared to the preceding year, reflects China's unwavering commitment to robust economic expansion.

• For Malaysia, the disparity between China's growth target does not immediately raise alarm bells. With more than 90% of its economic vitality rooted in domestic performance, Malaysia boasts a resilience that insulates it to a certain extent from external economic fluctuations. Acknowledging the modest slowdown projected for China and the prevailing uncertainties in the global economic landscape, we maintain our view of Malaysia. Our GDP forecast for the year 2024 holds steady at 4.7%.

Source: TA Research - 6 Mar 2024