Emerging markets debt: When China sneezes, will emerging-market countries catch a cold?
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Emerging Markets
Published
September 10, 2024
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Author
Vivian Liu, CFA
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The rise of China has been one of the single most important geopolitical events of the 21st century. In a variation of an old saying, when China sneezes, the world—especially emerging-market countries—is likely to catch a cold. In fact, some countries may well end up in the hospital.

 

In the modern, globally connected economy, the weight of a globalized Chinese economy now feels heavier than ever before. For example, as China’s economy has slowed since the Covid-19 pandemic, its demand for goods from other countries has also declined. Fewer Chinese imports mean fewer exports from other countries to China and, thus, less income for other countries.

 

At the same time, China’s citizens are understandably reluctant to buy items during times of economic difficulty, which is a problem not only for the Chinese economy but also for the greater global economy. There are also mounting worries that if Chinese exports flood foreign markets in a bid to find willing spenders, domestic sellers in those countries will suffer.3,4

 

Biggest contributors to world trade – exports

Sources: International Trade Center, StatiSense. Data as of September 12, 2023.

 

Shifting gears

When the pandemic hit, China’s government took drastic measures to control its spread, including effectively shutting down many large cities, which took a painful economic toll.

 

Although China’s economy recovered somewhat in 2023, with official GDP growth of 5.2%, it was still running well below its previous red-hot pace (roughly 7% average annual growth in the 2010s and more than 10% in the early 2000s). 

 

And that economic fragility continues today. Chinese policy makers have now recognized the need to shift their country’s development away from an investment- and export-oriented model toward one that is more oriented around consumption. As a result, they have rolled out measures aimed at boosting household spending, particularly in the property sector.

 

But the public doesn’t appear to be on board yet. Consumer confidence is near a record low and saving rates are near record highs. Meanwhile, foreign investment declined for the 13th straight month in June.5

 

Foreign investment in China
Year-over-year % change

Source: Bloomberg. Data as of June 2024.

 

The road ahead

China’s economic growth will likely continue to slow over the next few years. According to the International Monetary Fund, China’s GDP growth rate is projected to decelerate to 4.5% in 2025 and then decline further to 3.3% by 2029.6 As a result, China’s government has been encouraging its citizens to embrace the reality of slower economic growth by referring to it as the “new normal.”

 

But the transition is not an easy task. The absence of safety-net programs, (like Social Security and Medicare in the US) means Chinese households save a lot and typically invest both their income and savings in real estate, such as homes. These days, due to the tailspin in housing prices in the wake of China’s real estate crash, investing in that sector is not very appealing to the country’s citizens. 

 

Going forward, in the short term, China’s primary focus will likely center around encouraging households to increase consumption, shifting its economy away from low-skilled manufacturing exports and reducing its reliance on foreign and domestic infrastructure investments.

 

In the medium to long term, China will probably also have issues with its domestic demographics. Due to its past one-child policy, China faces rapid population-level aging in the coming years.

 

China economic growth challenges: International Monetary Fund forecast

Source: International Monetary Fund. Data as of August 2024.

 

Supply chain relocation

Politically, since 2018, tensions between the US and China have affected trade relations and accelerated the relocation of US supply chains from China to other countries.

 

Adding to the economic pressure, production costs in China have been rising over the past decade, which makes the country’s factories less appealing to global companies that are constantly searching for low-cost means of production. The combination has meant that supply chain relocation out of China has become increasingly frequent in recent years.

 

The strained US-China relationship is likely to continue, which also means China will find it more difficult to access cutting-edge Western technology—such as semiconductor manufacturing—than it has in the past.

 

The combination of internal and external headwinds will likely further curtail China’s efforts to become an advanced economy.

 

Impacts on emerging markets

For investors, the shifts in China are likely to create winners and losers among emerging-market countries. For example, among manufacturing exporters, Mexico has now become the United States’ largest trading partner. India, Vietnam, Thailand, Malaysia and Bangladesh are also stepping up to replace the world's factories.

 

Meanwhile, China’s deflationary spillover is benefiting countries that have been battling with high inflation. China’s weak domestic demand has left that country with idle capacity and the prices of goods being shipped around the world are falling.7,8

 

However, China’s woes have been bad news for commodity exporters. The country is the world’s biggest consumer of raw materials, importing up to 40% of the world’s industrial metals, 10% of the world’s crude oil and around 10% of the food eaten in China.9 In the past, its rapidly growing economy was an important source of global demand. Looking ahead, as China spends less on goods and services, it means less demand for raw materials and commodities. Big exporters such as Australia, Brazil and several countries in Africa will likely be negatively affected.

 

China: Consumer price index and producer price index
2021 to 2024

Source: Bloomberg. Data as of July 2024.

 

China's slowing GDP Growth
Year-over-year % change

Source: Bloomberg. Data as of December 2023.

 

 

1“The global economy is resetting, China is repositioning itself to export innovative technologies its trading partners are more diverse,” Hong Kong Economic Times via McKinsey Global Institute, April 22, 2024.

2“China’s massive belt and road initiative,” James McBride, Noah Berman and Andrew Chatzky, Council on Foreign Relations, February 2, 2023.

3“All of the world’s exports by country, in one chart,” Bruno Venditti, VisualCapitalist.com, Oct. 3, 2023.

4“Biggest contributors to world trade,” StatiSense, September 12, 2023.

5Foreign investment in China, Bloomberg, January 31, 2020 to June 30, 2024.

6“IMF executive board concludes 2024 Article IV Constitution with People’s Republic of China,” International Monetary Fund, August 2, 2024

7China consumer price index and producer price index, Bloomberg, August 31, 2021 to July 31, 2024.

8China GDP growth, Bloomberg, 1994 to 2023.

9“What is driving down commodity prices,” Erik Norland, OpenMarkets, February 15, 2024.

Important Information

Author

Vivian Liu, CFA
Intermediate sovereign research analyst

Vivian Liu, CFA, is an intermediate sovereign research analyst and is responsible for sovereign analyses of Asia and Europe. 

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Emerging markets debt: When China sneezes, will emerging-market countries catch a cold?
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