Recovery has not been even across all sectors, however, with China’s industrial sector growing by 3.9 per cent in March, which was still up from 2.4 per cent in January and February.
AFTER three years of rolling Covid-19 lockdowns and trade disruptions, China posted faster-than-expected GDP growth in the first quarter of 2023, at 4.5 per cent year-on-year (y-o-y), but the uneven nature of its recovery is sending mixed signals for emerging markets.
The strong performance, which exceeded the expectations of many analysts, was powered by 5.4 per cent expansion in the services sector, including a 10.6 per cent spike in retail sales in March, as pent-up demand and high domestic savings drove market activity.
Recovery has not been even across all sectors, however, with China’s industrial sector growing by 3.9 per cent in March, which was still up from 2.4 per cent in January and February.
China has powered global economic growth for decades, with emerging markets exporting raw materials to China and importing refined products at cheaper prices. However, given the country’s transition from a manufacturing-driven economy to a services-oriented one, trade between China and many emerging markets may take on a different shape in the years to come.
New supply chains
As China’s exports to developed markets such as the EU, Japan and the US have slowed amid recent geopolitical and trade competition, the country has turned to South-east Asian markets that are part of its Belt and Road Initiative.
Shipments to Asean surged by 35.4 per cent y-o-y in March, lifting overall exports by 14.8 per cent. Asean’s share of China’s overseas direct investment tripled from roughly five per cent in 2016 to more than 15 per cent in 2021, signalling the growing strategic importance of these markets.
Chinese export growth will affect emerging markets in different ways, potentially outcompeting certain countries.
During China’s economic slowdown last year, Myanmar and the Philippines saw their exports rise as they gained market share in the US and other developed countries as part of businesses’ China+1 strategy to diversify production capacity.
At the same time, developed markets that have forged new supply chain relationships with players like Vietnam and Thailand are not reversing course. China’s share of US imports of manufactured products from 14 low-cost Asian source countries fell from 53.5 per cent in 2021 to 50.7 per cent in 2022, even as overall imports from this cohort rose by 11 per cent.
Last year Vietnam posted a record trade surplus of US$94.9 billion with the US and, thanks to 15 new free trade agreements, its total exports rose by 10.6 per cent to US$372 billion, helping to fuel eight per cent GDP growth.
Equity markets support this trend. Anticipating China’s reopening, emerging market securities attracted US$65.7 billion in January, the highest since January 2021, while foreign funds acquired US$17.6 billion in Chinese equities in the same month, the largest amount since December 2020.
However, appetite for Chinese equities has since reversed, with the MSCI China Index trailing its Emerging Markets excluding China Index in terms of performance and capital inflows.
Export bump
Overall, export-oriented emerging markets with close trading relationships with China such as Vietnam and Malaysia − whose exposure to Chinese consumption is four and three per cent of GDP, respectively − will benefit directly from China’s recovery.
The opening of border crossings with Vietnam has already seen agricultural exports – as well as prices – surge in 2023. In February prices for white-fleshed dragon fruit from Vietnam were up 10 per cent since the Lunar Holiday in January and three-fold y-o-y. Overall, fresh fruit exports from Vietnam to China are expected to reach US$5.59 billion in 2023, up from US$5.04 billion in 2022.
Exports will help redress the country’s trade deficit with China, which grew from US$54 billion in 2021 to a record US$60.2 billion in 2022, as imports from China rose by 6.6 per cent to US$117.9 billion.
Meanwhile, China’s largest trading partner Malaysia is proactively looking to expand their bilateral relationship. Prime Minister Datuk Seri Anwar Ibrahim visited China in April, securing US$555.3 million in potential exports of durian, food and beverages, iron products and palm oil. Prime Minister Anwar also announced that China will invest US$38.6 billion in Malaysia, including in the automotive and petrochemical industries.
Commodity-exporting countries are likely to benefit from China’s recovery, as GDP growth correlates with demand for hydrocarbons, metals and minerals. Chinese oil demand reached its highest monthly level since June 2020, importing 12.3 million barrels per day (bpd) in March, up from 10.1 million bpd in March 2022.
Malaysia has already seen the benefit of this surge: its oil exports to China were up 144 per cent y-o-y in the first two months of 2023, reaching 0.65 million bpd. Russia surpassed Saudi Arabia to become China’s top supplier during this period, as its exports rose from 1.57 million bpd to 1.94 million bpd. Saudi Arabia contributed 1.72 million bpd, down from 1.81 millino bpd.
Meanwhile, the UAE reached a milestone with China in energy trade in March, sending 65,000 tonnes of liquefied natural gas paid for in Chinese yuan on the Shanghai Petroleum and Natural Gas Exchange.
Calling all tourists
Tourism-oriented countries in South-east Asia are set to see a significant increase in Chinese holiday seekers, as flight restrictions, visa constraints and entry rules targeting Chinese citizens have prompted them to forego trips to traditionally popular destinations like Australia, Canada, Europe, Japan and South Korea.
During the Lunar New Year in February, Bangkok, Singapore, Kuala Lumpur, Chiang Mai, Manila and Bali were among the top destinations for Chinese travellers, powering 640 per cent y-o-y growth in foreign travel from China.
Thailand is the top destination in South-east Asia for Chinese tourists, with hotel bookings in Bangkok rising 33-fold during this year’s holiday period. The country already saw a rise in total foreign tourist arrivals, from 400,000 in 2021 to 11 million in 2022. This is expected to more than double to 25 million in 2023, with the Thai government projecting more than five million visitors from China.
Meanwhile, Malaysia aims to attract 16 million foreign visitors in 2023, of which 5m are projected to come from China, though high travel costs and a lack of flights could make these targets difficult to meet.
Nevertheless, the country’s Ministry of Tourism recently signed agreements with two Chinese tour agencies to bring 450,000 visitors this year.
China was the Philippines’ second-largest tourism market in 2019, with 1.7m visitors. The country is targeting 4.8 million Chinese tourists this year after welcoming 2.6 million in 2022.
Its Ministry of Tourism launched the Bisita, Be My Guest programme to encourage Filipinos to invite more Chinese guests, especially to take advantage of the country’s ecotourism offering.
This column was produced by the Oxford Business Group.