There has been much discussion about the potential impact on the global economy of a Greek exit from the eurozone. Less debated is what effect a softening of Chinese demand, particularly for raw materials, could have on parts of the global economy.
A Chinese slowdown is likely to be less dramatic than a Greek exit. That is probably why no one has yet invented a silly term to match Grexit. (I’m offering “Chindown”, as in “keeping one’s chin down”.) Given the weight of China’s economy and its importance to some commodity exporters, perhaps rather more thought should be given to the topic. After all, unlike a Grexit, which no one wants, Beijing has actually announced its intention to engineer a Chindown. China’s five-year plan, which runs to 2015, talks specifically of weaning the economy off investment-led, commodity-hungry growth and easing the annual rate of growth down to 8 per cent from the double digits of recent years. For several economies the stakes are high. Over the past 20 years, many countries’ trade with China has ballooned. In 1992 China accounted for a measly 0.9 per cent of Brazil’s trade. By 2010 that had shot up to 14 per cent. Other commodity producers have seen a similar explosion. Pakistan’s trade with China rose from 2.9 per cent to 13.5 per cent and India’s from 0.4 to 10.5 per cent.
As Europe and the US have stalled, China has become an alternative growth engine. A sort of feedback loop developed in which China bought commodities from countries that used the money to purchase Chinese manufactures. As a result, China has become the main trading partner of several countries, including Australia, South Korea, Japan, the Philippines, Brazil, Chile, Peru, Angola and South Africa. Some of these could be hurt as China slows. Not only would Chinese demand itself fall, but prices of the commodities it needs – oil, copper and iron ore – would also soften.
One country that stands to lose is Brazil. An article in Foreign Affairs by Ruchir Sharma*, head of emerging markets at Morgan Stanley, argues that Brazil’s recent success “rests on an extremely shaky premise: commodity prices”. That is to say it relies, to a worrying degree, on China. A Chindown could mean the end of Brazil’s “magic moment”, Mr Sharma says. The same applies to others. “China’s lagging growth signals the end of an era in which emerging markets experienced unusually rapid expansion.”
Another emerging market that fits the same pattern is Mongolia. China accounts for no less than 92 per cent of its exports, a percentage that may actually rise as a massive copper mine comes on stream later this year. Mongolia is making some efforts to diversify. It wants to send commodities thousands of miles to Russia’s Pacific coast even though its mines lie along the Chinese border. Ulan Bator’s extravagant plan to hedge its bets points to just how hard it may be for some countries to kick the China habit.
The list of China dependants is not restricted to the developing world. Australia is also reliant on China – or, more accurately, on the high commodity prices engendered by Chinese demand. Indeed, some of the big investments planned by mining companies on the basis of an endlessly hungry China are already being shelved. Marius Kloppers, chief executive of BHP Billiton, recently said the economics of some mining projects had changed, forcing it to put them on hold. Dylan Grice of Société Général put it thus: “If Chinese resource demand holds up, everything will probably be fine. But if it doesn’t, everything won’t be.”
A China slowdown need not be bad for everyone. Frederic Neumann, regional economist at HSBC, distinguishes between hard and soft commodities. A Chinese rebalancing could actually be good for soft commodities, such as wheat and soyabeans, if household spending were to rise. Brazil’s loss, in other words, could be Argentina’s gain. Other commodities, such as palm oil, used in processed foods, may also do better. That could benefit countries such as Malaysia, which has ramped up palm oil production in recent years, and Indonesia – although the latter also produces hard commodities including coal. On the other side of the ledger, some big oil importers could benefit from the weaker prices that a Chinese slowdown might produce.
If Greece goes, almost everyone will suffer. But as China slows, the impact is likely to be more mixed. Only for some will it spell the end of their magic moment.
*‘Bearish on Brazil: The Commodity Slowdown and the End of the Magic Moment’, Foreign Affairs (May/June)
