Emerging Markets—Asia most at risk from China slowdown

In its April World Economic Outlook, the IMF revised down China’s economic growth estimate to 4.4% for 2022 from an earlier prediction of 4.8%. That’s much slower than the 6.7% average annual growth recorded over the five years to 2019. What’s more, the prospect of enduring COVID-19-related lockdowns raises the risk of an even sharper slowdown. Emerging markets (EMs), particularly in Asia, are most at risk from lower Chinese demand for consumer goods and services and more severe supply chain disruptions if Chinese manufacturing hubs face lockdowns.

Of selected EMs, Malaysia’s exports of consumer goods to China, which account for 2.5% of GDP, are the most exposed to weaker Chinese import demand. Thailand and Indonesia are also exposed through this channel, but to a lesser extent. The impact of lower Chinese outbound tourism hits Thailand the hardest, where Chinese holidaymakers accounted for around 28% of all Thailand visitor arrivals before the pandemic. The Philippines also has a relatively high exposure to lower Chinese tourism arrivals. An announcement by China’s National Immigration Administration in May that it would ban all non-essential foreign travel by Chinese citizens is expected to exacerbate the impact on Chinese tourism destinations, with outbound Chinese tourism likely to be close to zero until this measure is lifted. In the event of worsening supply chain disruptions in China, the electronics sector is likely to suffer markedly. That would hit several EM Asian economies, where electronics contributes a significant portion of output, including Thailand, Malaysia and the Philippines. EMs outside of Asia are also vulnerable to electronics supply disruptions, including Mexico and Turkey.

Chinese authorities have already announced measures to stimulate the economy, such as easing monetary policy, deferring taxes and fees for small business, and bringing forward infrastructure spending. Should Chinese growth slow to the extent that the government’s official growth target of 5.5% appears unattainable, authorities would likely use additional stimulus to spur economic activity. That may include additional investment in infrastructure and property construction, which would further support demand for, and prices of, commodities, such as iron ore, coal and copper. This would benefit EM commodity exporters, such as Chile, Brazil, Indonesia and South Africa, helping to mitigate potential challenges in consumer goods and services sectors.

Figure 1 - Emerging market exposure to China slowdown with selected indicators and emerging markets