BEIJING – China’s economy was meant to drive a third of global economic growth in 2023, so its dramatic slowdown in recent months is sounding alarm bells globally. 

Policymakers are bracing themselves for a hit to their economies as China’s imports of everything from construction materials to electronics slide. Caterpillar says Chinese demand for machines used on building sites is worse than previously thought. US President Joe Biden called the economic problems a “ticking time bomb”.  

Global investors have already pulled more than US$10 billion (S$13.6 billion) from China’s stock markets, with most of the selling in blue chips. Goldman Sachs Group and Morgan Stanley have cut their targets for Chinese equities, with the former also warning of spillover risks to the rest of the region.

Asian economies are taking the biggest hit to their trade so far, along with countries in Africa. Japan reported its first drop in exports in more than two years in July after China cut back on purchases of cars and chips. Central bankers from South Korea and Thailand last week cited China’s weak recovery for downgrades to their growth forecasts.  

It is not all doom and gloom, though. China’s slowdown will drag down global oil prices, and deflation in the country means the prices of goods being shipped around the world are falling. That is a benefit to countries such as the United States and Britain that are still battling high inflation. 

Some emerging markets like India also see opportunities, hoping to attract the foreign investment that may be leaving China’s shores.

But as the world’s second-largest economy, China’s prolonged slowdown will hurt, rather than help, the rest of the world. An International Monetary Fund analysis shows how much is at stake: When China’s growth rate rises by 1 percentage point, global expansion is boosted by about 0.3 percentage point.

China’s deflation “isn’t such a bad thing” for the global economy, said Mr Peter Berezin, chief global strategist at BCA Research.

“But, if the rest of the world, the US and Europe, falls into recession, if China remains weak, then that would be a problem – not just for China but for the whole global economy.”

Here is a look at how China’s slowdown is rippling across economies and financial markets.

Trade slump

Many countries, especially those in Asia, count China as their biggest export market for everything from electronic parts and food to metals and energy.

The value of Chinese imports has fallen for nine of the last 10 months as demand retreats from the record highs set during the Covid-19 pandemic. The value of shipments from Africa, Asia and North America was all lower in July than it was a year ago.

Africa and Asia have been the hardest hit, with the value of imports down by more than 14 per cent in the first seven months of 2023. Part of that is due to a drop in demand for electronics parts from South Korea and Taiwan, while falling prices of commodities such as fossil fuels are also hitting the value of goods shipped to China.

So far, the actual volume of commodities such as iron or copper ore sent to China has held up. But if the slowdown continues, shipments could be impacted, which would affect miners in Australia, South America and elsewhere around the world.

Deflation pressure

Producer prices in China have contracted for the past 10 months, meaning the cost of goods being shipped from the country is falling. That is welcome news for people around the globe still struggling with high inflation. 

The price of Chinese goods at US docks has fallen every month in 2023, and that is likely to continue until factory prices in China return to positive territory. Economists at Wells Fargo & Co estimate that a “hard landing” in China – which they define as a 12.5 per cent divergence from its trend growth – would cut the baseline forecast for US consumer inflation in 2025 by 0.7 percentage point to 1.4 per cent. 

Slow tourism rebound

Chinese consumers are spending more on services, such as travel and tourism, than on goods – but they are not yet venturing overseas in large numbers. Until recently, the government had banned group tours to many countries and there is still a lack of flights, meaning it is much more expensive to travel than it was before the pandemic. 

The pandemic and weak economy have curbed incomes in China, while the years-long housing market slump means home owners feel less wealthy than before.

That suggests it may take a long time for overseas travel to rebound to the levels they were at before the pandemic, hitting tourism-dependent nations in South-east Asia such as Thailand.

Currency impact

China’s economic woes have pushed the currency down by more than 5 per cent against the US dollar this year, with the renminbi close to breaching the 7.3 mark this month. The central bank has escalated its defence of the renminbi through various measures, including its daily currency fixings.

The depreciation in offshore renminbi is having a greater impact on its peers in Asia, Latin America and the Central and Eastern Europe bloc, Bloomberg data shows, with the correlation of the Chinese currency to some others rising.

The weak sentiment spillover may weigh on currencies such as the Singapore dollar, Thai baht and Mexican peso as correlations rise, according to Barclays Bank. 

Ms Magdalena Polan, head of emerging market macro research at PGIM, said: “With the weaker China economy, it’s very difficult to be optimistic on the Asian economies and currencies, and we’re more concerned about the metal-exposed currencies.” Weakness in the construction sector may see currencies of commodity-led economies, such as the Chilean peso and South African rand, suffer, she added.

The Australian dollar, which often trades as a proxy for China, has lost over 3 per cent this quarter, the worst performer in the Group of 10 basket.

Bonds lose appeal

China’s interest rate cuts in 2023 have reduced the appeal of its bonds to foreign investors, who have cut their exposure to the market and are looking for alternatives in the rest of the region. 

Overseas holdings of Chinese sovereign notes are at the lowest share of the total market since 2019, according to Bloomberg calculations. Global funds had turned more bullish on the local currency bonds of South Korea and Indonesia as central banks there near the end of their interest-rate hiking cycles. 

Luxury stocks 

Companies from Nike to Caterpillar have reported a hit to their earnings from China’s slowdown. An MSCI index that tracks global companies with the biggest exposure to China has retreated 9.3 per cent in August, nearly double the decline in the broader gauge of world stocks.

A gauge of European luxury goods and Thailand travel and leisure also tracks losses to China’s onshore equity benchmark. The sectors are “accurate reflections of how global investors may take indirect exposure to China and the outlook as China’s economy continues to weigh”, said Mr Redmond Wong, a market strategist at Saxo Capital Markets in Hong Kong. 

Luxury goods firms such as Louis Vuitton bag-maker LVMH, Gucci owner Kering and Hermes International are particularly vulnerable to any wobbles in Chinese demand. BLOOMBERG