Moneycontrol Pro Panorama | When China sneezes, Asia risks catching a cold

China’s worries will see pressure build on commodity companies, as the country is a large producer and consumer of all sorts of commodities, such as metals, agriculture and chemicals.

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The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

High frequency data in recent months did point to cracks in China’s economy. GDP data for the June quarter confirmed this, rising by 0.8 percent over the preceding quarter, slower than the 2.2 percent growth it achieved in the March quarter, according to a Reuters report. While year on year growth was 6.3 percent, this was below a Reuters’ forecast of 7.3 percent.

Other high frequency data released for the month of June showed an increase in youth unemployment, anaemic retail sales growth and a shrinking in private capital investment. However, industrial output data showed an improvement compared to May. Calls for fiscal and monetary stimulus measures have been growing louder by the month and every passing month seems to give more reasons for it. But policymakers don’t seem moved by them.

Today’s FT selection ‘Does Xi Jinping need a plan B for China’s economy?’ takes an in-depth look at the issues pertaining to China’s slowdown and what needs to be done. If you are puzzled by the relatively relaxed approach to reviving growth, this paragraph gives clues on why: ‘“Xi Jinping does not define economic success in terms of GDP growth,” says Arthur Kroeber, founding partner and head of research at Gavekal Dragonomics. “He defines it in terms of tech self-sufficiency.” As long as the government can hit its targets on this front, he says, “then his calculation is we can figure out how to spread the growth enough to keep people content”.

That is not a very comforting assessment. It means Beijing may be comfortable with lower growth rates but that could cause more trouble for the rest of the world in the coming quarters. Do read the FT piece (free for MC Pro subscribers) to get a comprehensive lay of the issues at hand.

The global economy is also in flux as developed economies are attempting to rein in inflation and throttling growth in the process. With two large economic regions in a slowdown mode, it risks hurting countries such as India. Last week’s trade data saw India’s exports and imports of goods moderate, and services exports also fell sharply, indicating a sharper fall in external demand compared to domestic demand, as pointed out by Nomura Research.

IT company results have already pointed to troubles for the sector and as companies with exposure to exports report results, a better picture of how these trends are playing out at the micro level will become available. Certainly, China’s worries will see pressure build on commodity companies, as the country is a large producer and consumer of all sorts of commodities, such as metals, agriculture and chemicals.

A note by ING points to oil prices coming under pressure after the data was released and expects the commodity complex to be under pressure. Falling commodity prices will lead to pressure on performance of industries while a slowing economy could cap exports growth. Their hope must be that developed economies achieve their soft landing fast enough, so that monetary policy pivots to an accommodative stance. A fall in commodity prices will ease input cost pressures but that benefit may be of little use if demand conditions become very weak.

Slowing growth in China is a risk for Asian economies with trade ties to the country. Today’s Eastern Window column analyses the difficult position they are in, as they try to navigate the troubled relationship between the US and China. While the US may be important from a geopolitical standpoint for its military support, China’s position as a crucial trade partner poses a risk for their economies. Their trade data too points to the pressure from China’s slowing growth.

Of course, India’s domestic economy is in a much stronger position. Today’s Chart of the Day points to how the FMCG sector of various countries in Asia are doing. India is way ahead on the sales growth front in Q1 2023 but it’s still not the fastest growing, with that privilege going to the Philippines. Do read to know more.

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Ravi Ananthanarayanan
Moneycontrol Pro