Will EMs gain from China’s strong recovery? - Capital Economics
Emerging Markets Economics

Will EMs gain from China’s strong recovery?

Emerging Markets Economics Update
Written by Nikhil Sanghani

China’s strong economic recovery is likely to provide more of a support to the recovery in (non-oil) commodity producers in Latin America and Africa than it will in the rest of Asia. But we don’t think that China’s growth will provide as much of a boost to EMs as it did after the Global Financial Crisis.

  • China’s strong economic recovery is likely to provide more of a support to the recovery in (non-oil) commodity producers in Latin America and Africa than it will in the rest of Asia. But we don’t think that China’s growth will provide as much of a boost to EMs as it did after the Global Financial Crisis.
  • China’s economy is on course to return to its pre-virus trend by the end of this year – a far quicker recovery than we are expecting anywhere else in the emerging (or indeed developed) world. Its rebound has been driven by stronger investment, led by the state sector. (See Chart 1). This has drawn parallels with the country’s stimulus-led recovery following the 2008/09 Global Financial Crisis (GFC).
  • The 2009 stimulus mainly focused on infrastructure and property spending. This fuelled a surge in industrial commodity import volumes and a sharp rise in global commodity prices. Natural resources producers benefitted on both fronts. For instance, as a share of their own GDP, goods exports to China rose by 5-10% in Zambia and Malaysia in 2008-10, and by around 2% of GDP in Kuwait, Angola and Chile. (See Chart 2.) More generally, rising commodity prices boosted producers’ terms of trade, supporting domestic incomes and helping to fund expansionary fiscal policies. Many EMs also experienced higher capital inflows, primarily into natural resource sectors, on hopes of a continued commodities ‘super-cycle’.
  • That said, for most of Asia, rapid growth in China was not the boon that many assume. Aside from Malaysia and Indonesia, economies in the region aren’t major commodity producers. And there wasn’t particularly strong demand for imported manufactured products in which the likes of Taiwan, Vietnam and Korea specialise. The 1-2% of GDP the pick-up in exports to China from these countries reflected the recovery in the global economy, rather than stronger Chinese demand. And exports to China actually fell relative to GDP in the Philippines, Hong Kong and India. (See Chart 2 again.) Otherwise, higher disposable incomes in China provided only a small boost to tourism sectors and other foreign services in the rest of the region.
  • Similar patterns will play out this time. China’s stimulus is again infrastructure-heavy (albeit with less focus on property this time). And, as it did in 2009, this has boosted commodity import volumes – particularly from producers such as Chile – as well as industrial metals prices. (See Chart 3.) Copper, nickel and zinc have been the biggest beneficiaries. We think this trend has a bit further to run over the coming quarters.
  • Based our commodity price forecasts, we think that major metals producers such as Zambia, Chile and Peru will receive a boost to their terms of trade this year and next. (See the left-hand side of Chart 4.) That will help to support domestic incomes and aid their recoveries. In contrast, oil producers such as Kuwait, Angola and Oman will continue to struggle (see the right-hand side of Chart 4), as we expect oil prices to remain well below their pre-pandemic levels owing to subdued global demand.
  • Meanwhile, Asian economies won’t receive much of a boost from China’s recovery. Although we expect consumer spending in China to strengthen, this is unlikely to boost demand for foreign manufactured goods. Indeed, China’s imports of finished consumer goods are negligible. And in many industries China is less dependent on imported components than it was a decade ago. Otherwise, Asian economies can’t bank on higher Chinese overseas tourism – this will be one of the last areas of demand to recover from the crisis.
  • As a result, (non-oil) commodity producers are once again set to ride the wave of China’s stimulus-led recovery. But there will be two key differences from the post-GFC experience. First, the boost from stimulus is likely to fizzle out more quickly. Authorities in China are already weighing up the trade-off between additional stimulus against concerns about debt and financial stability. That was not the case in 2009. Accordingly, we expect a smaller boost to commodity prices and producers’ terms of trade this time.
  • Second, domestic factors will have a larger bearing on the pace of recoveries. The nature of this crisis is different to the GFC. Containing the spread of the virus is the key to faster growth, as this will allow activity to strengthen across the economy. Indeed, despite keeping mines open and maintaining strong exports to China, Chile’s economy still contracted by 13.2% q/q in Q2.
  • That owed to severe weakness in its non-mining sector. This is a stark reminder that a renewed rise in virus cases has the potential to disrupt recoveries, including in the commodity producers that stand to gain the most from China’s recovery. These factors help to explains why we hold below-consensus GDP forecasts for much of the emerging world, even though we are more upbeat than most about the outlook in China.

Chart 1: China Fixed Asset Investment (% y/y)

Chart 2: Change in Merchandise Exports to China
(2008 to 2010, % GDP)

Chart 3: S&P GSCI Indices (1st Jan. 2020 = 100)

Chart 4: CE Estimate of Change in Net Commodity Exports (% of GDP)

Sources: Refinitiv, Intracen, CEIC, Capital Economics


Nikhil Sanghani, Emerging Markets Economist, nikhil.sanghani@capitaleconomics.com