Issue link: https://maltatoday.uberflip.com/i/1507175
10 WORLD 7.9.2023 IN large swathes of the world, con- sumers are enduring high prices, and high interest rates. In its fight against inflation, the US Federal Reserve has pushed interest rates to their highest levels in 22 years. In the past couple of months, the Bank of Canada, the European Central Bank, and the Bank of England have all raised rates. And there is little consensus on what deci- sions central banks will make in Sep- tember. However, one central bank cut in- terest rates in August – the People's Bank of China lowered its one-year loan prime rate to 3.45%. China doesn't have an overheated economy and thus is chartering its own macro- economic policy path. However, this is not to say the picture is rosy. Pol- icymakers in Beijing are confronted with their own set of challenges, in- cluding deflationary pressures, yuan depreciation as well as a shrinking property sector. Economists and market observers suggest that these challenges could potentially have broader implications beyond China's borders, such as: The impact on global metal export- ers, New trade partnerships, and Cheaper goods for developing mar- kets. Does this mean that now's the time to bet on China? Or does it make sense to bet against the world's man- ufacturing hub? We address each of these in some detail. Metal exporters hurting The downturn of the property sec- tor, which used to be a primary eco- nomic growth driver, is an example of the impact of China's campaign to deleverage its economy and reduce its reliance on debt- and investment-led growth. This downturn has had wid- er reaching effects, as amidst weak Chinese domestic investment and sluggish sales of new homes, com- modity-exporting countries that are exposed to China as an end market have taken an immediate hit. Economists think this environment will continue to depress global com- modity demand and the price of com- modities. Robert Gilhooly, senior emerging markets economist at abrdn, says: "Commodity exporters, such as Chile, Peru, South Africa, and Australia, could see less demand from China. This in turn will lead to cooling glob- al prices, with knock-on effects im- pacting investment, tax revenues, and broader business sentiment." Over the longer-term, the delever- aging exercise that is currently un- derway is an attempt to transition the economy to one that is more consumption-led, as opposed to an investment-led one. Gilhooly ex- plains: "Since investment is relative- ly import-intensive, China's shift to endemic living is likely to provide a relatively muted boost to its trading partners." In Gilhooly's view, among major emerging markets, Chile and Peru are particularly dependent on metal and ore exports, and as such they could be more exposed to a further drop in property-related import demand from China. Let's make a deal Equally, investors should not forget that the trading pattern isn't static, and subdued demand from China can be offset by other economies and sec- tors that are in need of raw material and commodity inputs. Chris Kushlis, chief of China and emerging markets macro strategy at T Rowe Price, agrees that producers of metals solely tied to housing con- struction could face pressure from China's slowing property develop- ment. However, a shift towards green energy infrastructure may provide support to metals-intensive export- ers in South America, Indonesia, and South Africa. On the other hand, Kushlis be- lieves China's offshoring of lower value-added production to frontier markets in Asia has the potential to bolster consumer goods exports from those regions and argues that these changing trade patterns have differ- ential effects across Asia and emerg- ing markets. Aninda Mitra, head of Asia macro and investment strategy at BNY Mel- lon Investment Management, mon- itors the import intensity dynamic between China and its trading part- ners. He says: "The outlook for Asian exporters increasingly hinges on the global outlook and not just China. This is because China's import inten- sity – how much it imports per unit of GDP growth – has been slipping for a while now. Falling import intensity has been led by the secular easing of processing trade, the Sino-U.S. trade conflict, and the downturn in China's property sector." The price is right Exports to China could be under pressure, but cheaper products are a boon to importers of Chinese man- ufactures. This holds especially true for economies struck by stubbornly high inflation, which welcome lower prices from the world's manufactur- ing hub. Tiffany Wilding, economist and managing director at PIMCO, says: "While disruptions and changes to post-pandemic economies have raised questions about the extent to which the Chinese economy still dominates global trade and industrial cycles, we see several reasons to ex- pect spillovers to intensify in devel- oped markets." She believes deteriorating Chinese economic fundamentals have pro- duced deflationary pressures that are already moderating inflation both in China and in the global markets served by Chinese goods. In Wilding's view, persistent defla- tion in China would likely spill over to developed markets. "A weaker yuan and elevated inventory-to-sales ratios lower the cost of Chinese goods abroad – a development central bank- ers in developed markets would likely welcome." According to the National Bureau of Statistics of China, the producer price index (PPI) – which tracks the prices that factories charge wholesalers for products – fell by 4.4% year on year in July and was down for a tenth consec- utive month. While a declining PPI that is typical of deflationary periods tends to signal an upcoming economic slowdown, Wilding thinks the spillover of falling prices of Chinese products is deemed near-term good news for the Western central banks' fight against elevated inflation. She explains: "Despite changing linkages between China and the glob- al economy as Beijing tries to tran- sition to a consumption-led growth model and trade tensions remain ele- vated with the West, China is still the world's manufacturer." Over the short-term, Wilding is ob- serving the usual lags in economic prints and says: "Deflationary spillo- vers have likely only just begun to im- pact global consumer markets, with discounting likely to accelerate over the coming quarters. Show me the money: economists awaiting stimulus As the backdrop remains deflation- ary for China, economists say the next catalyst that they think is per- tinent to kickstarting the economy is policy stimulus. BNY Mellon IM's Mitra is among the market watchers who worry that China could see a worse year ahead if the right amount of policy support isn't in place. "[The property sector] is indeed the biggest driver of the downturn in the Chinese economy. It accounts for around one-quarter of Chinese GDP and its slump has clearly hurt growth. But the erosion of private sector con- fidence has, likely, limited the scope for any offsetting upturn and fueled the deflationary spiral." At the time being, Mitra says he's awaiting "a larger stimulus, which has been hinted at, but has not ma- terialised thus far." As he calls for a supportive policy package, he says: What economists think a China downturn