China's economic slowdown: A double-edged impact on PH

MANILA, Philippines – China may not only make itself felt politically in the Philippines this year, but economically as well.

The IMF recently lowered its expectations for global economic growth from 3.7% to 3.5% due in part to China’s economic slowdown.

Official data released on January 20, 2015 showed that China’s economy grew by 7.7% last year, its smallest gain in 24 years.

Most China observers agreed that the slower pace is part of a trend as China’s economy transitions from being export-oriented to being consumption-driven.

An abrupt and dramatic downturn in China’s economy will have drastic effects for the world and for its Asia-Pacific neighbors.

China’s growth consistent

However, a sudden drop is unlikely. Instead, China’s growth will be consistent although not as large as in previous decades, Ayhan Kose, director of the World Bank Economic Prospects Group said.

While there are concerns over China’s growing financial market excesses, Kose explained that China is protected through fiscal and institutional buffers, as well as by its substantial reserves.

If growth were to suddenly slow, China has room to stimulate the economy given that its public debt stands only at about 55% to 65%, Kose explained.

In addition, China’s government exerts considerable control over its financial industry as it is still largely state dominated and sizeable capital controls exist to prevent a slump.

Also, any significant movements of the Chinese Yuan can be counteracted using the vast reserves the country has built up en route to becoming the largest exporter in the world.

As long as growth stays around the 7% mark, China will continue to create “positive spillovers” for the rest of the region, Kose said.

The World Bank’s forecast growth rates for China are 7.1% in 2015; 7.0% in 2016; and 6.9% in 2017.

China’s influence

China is a growing economic influence in the Philippines but the US, Japan, and other Asian economies also play a significant part in trade relations, said Joey Cuyegkeng, senior economist at ING Bank Manila.

In the first semester of 2014, China ranked as the Philippines’ second largest trading partner, ahead of the US and behind Japan. Total trade volume with China was $8.78 billion (P 384.7 billion), representing 14.3% of the total trade.

Exports to China accounted for $4.06 billion (P203.4 billion) while imports totaled $4.71 billion (P 20.8 billion), running a trade deficit of $649.80 million (P2.87 billion), according to the NSO.

In 2013, China was the Philippines’ third largest trading partner, behind US and Japan.

Total trade between the two nations amounted to $15.10 billion (P667.7 billion) or 12.7% of all foreign trade in 2013, according to data from the National Statistics office (NSO).

Indirect, double-edged impact

China’s slowing economic growth has an indirect impact on the Philippines through global commodity prices, Cuyegkeng said.

Prices for marquee commodities such as crude oil, copper, iron ore, and nickel have plummeted due in no small part to lower Chinese demand, industry observers said. 

Falling commodity prices could also be “double-edged” for the Philippines.

Commodity exporters may suffer the effects of lower demand for certain goods.

The mining sector was singled out as one that could be directly affected due to lower global metal prices. Metal production value in the country for first 9 months of 2014 rose by 37% to P102.47 billion ($2.32 billion) from P74.82 billion ($1.70 billion) in the same period in 2013 on significant earnings from nickel direct shipping ore and mixed nickel sulfides.

“On one hand, low oil prices is a positive for a net oil importing economy such as the Philippines, resulting in lower inflation and higher purchasing power for Filipino consumers,” Cuyegkeng said.

Domestic demand rules

“The most important driver for Philippine growth, as has been in the past, is still domestic demand,” Cuyegkeng stated, noting that the US and Asia, excluding Japan, are all still growing.

“As long as factors affecting domestic demand improve or remain strong, then we should be able to post reasonable 6% plus growth even as China slows to around 7% growth in the next few years,” Cuyegkeng said.

Since domestic demand is the biggest driver for growth, a slowing China should not worry the Philippines too much.

The only drastic effect it would have in the short-term is if China’s economy would suddenly implode – which is unlikely to occur, Kose noted.

In fact, China’s gradual transition from export-oriented to a consumption driven economy may even be a blessing in disguise for the Philippines in the form of increasing the country’s attractiveness as an alternative investment destination.

The Philippine export sector has outperformed China’s of late, driven in part by demand coming from China.

As Cuyegkeng noted, strong fundamentals and a boost in sovereign credit ratings have been opening up new fund sources and investment opportunities for foreign direct investors to the country. – Rappler.com

US$1 = P44.21