2. China plays a prominent role in the global economy on multiple fronts, including trade, foreign direct investment, and even outward direct investment.
3. Spillover Effects
i. Slowdown in China’s growth should have relatively small spillover effects for the developed markets.
ii. Most developed economies have a domestic market deep and wide enough to be selfsufficient. However, countries that are heavily exposed to China’s demand, including commodity exporters such as Australia, Brazil, and South Africa, and emerging market (EM) Asian neighbors such as South Korea and Taiwan, could feel more pain as China’s rebalancing and transition proceeds.
iii. However as China’s growth slows, there likely will be global deflationary pressure, through both lower import prices and commodity prices. China’s neighbors in EM Asia are more sensitive because of the tighter trade links
iv. An estimation that every 1 percentage point decrease in China’s inflation would result in a decrease of about 0.07 percentage point in the U.S.
4. Currency
i. A weaker renminbi could trigger competitive devaluation in many export-oriented economies, but it could also be perceived as a signal of China’s economic weakness and spark a global risk-off sentiment that will weigh on EM currencies and assets. However China’s official holding of U.S. Treasuries is only about 8% of the deep U.S. Treasury market as of October 2016.
ii. A Chinese sell-off to prevent rapid depreciation of its currency alone is unlikely to cause major reverberations, given the Treasury market’s high liquidity and depth. Furthermore if China achieves a gradual slowdown, the impact on overall global growth should be limited.
ii. In the long term, if China makes a successful transition and revives growth, there could be a positive spillover to the rest of the world, especially to countries that benefit from the stronger consumer power in China.
5. Global Financial Markets
i. As of January 2017, China had the third-largest bond market, after the United States and Japan, with a total outstanding bond amount of $9.2 trillion.
ii. In the A-share (onshore) market, total capitalization has grown by 480% since the beginning of 2007, while the floating share has become more dominant.
iii. the A-share market offers diversification benefits in a global portfolio and exhibits a much lower correlation with the rest of the global equity market, adding further value as a diversifier in a portfolio
iv. In the long run, the equity market return has little correlation with economic growth. Hence, the A-share market return and its diversification benefit in a global portfolio in the long run should be independent of the future economic growth scenario
v. The increase in Chinese assets abroad would be positive for the global market. The IMF projected that full capital account liberalization in China may be followed by an increase in Chinese assets abroad of 15%–25% of GDP and a smaller increase for foreign assets in China of 2%–10% of GDP (IMF 2016).
vi. The accumulation of international portfolio assets by Chinese residents upon further capital account liberalization could have significant repercussions for global asset prices. If allocated along MSCI portfolio shares, this accumulation would account for up to 3% of global financial markets, or up to a quarter of financial markets in emerging-market economies
CHEMICAL INDUSTRY
1. China’s decline in trade is clearly related to world trade, as China is only responsible for about 12% (1Q 2015) of world trade. The economies of Europe, the U.S. and Japan have much to do with the slowdown.
2. Lists of implicit role of chemicals in everyday goods.
i. Food – Fertilisers Nitrogen, Phosphorus and Potassium are major chemicals used to fertilise crops. As China’s own resources are not enough to satisfy its huge agricultural industry, large amounts of phosphorus and potassium have to be imported from abroad.
ii. High-Tech Products – Rare Earths Rare Earths are essential raw materials for most of the latest technology, including mobile phones, laptops, defence missiles, radar systems and also green technology such as turbines and hybrid vehicles. China currently controls 97% supply of Rare Earths in the world.
iii. Paint & Coating – Fine/Specialty Chemicals Paints and water-proof coating require fine chemicals as ingredients. China now produces more than 30,000 different kinds of fine chemicals, however in most cases the technology and equipment used in China are the same as those developed countries were using a decade ago.
iv. Plastics – Petrochemicals A main component of plastic is Ethylene which originates from chemicals derived from Petroleum, or namely petrochemicals. Although petrochemicals now have a solid base in China, there is a deficit as the amount of Ethylene consumed is nearly twice the amount produced.
v. Textiles – Synthetic Fibres Synthetic fibres have developed very quickly in the last decade, with polyester and nylon (Polyamide) accounting for most of China’s output in this area; it is now one of the world’s largest producers. Although China does not produce a wide enough range of special/ high-quality fibres, it is leading the growth of certain fibres. For instance, the special elastic fibre Spandex is used to make swimsuits, leggings and tights. As a key garment export country, the demand for Spandex from manufacturers in China grew 20% annually in the past five years, fuelling a national output of more than 200 kilo-tonnes (kt) in 2010
vi. Vitamins – Organic Chemicals Vitamins and foodstuff processing (e.g. dying) are two of the key sectors demanding organic chemicals. The chemicals have to be imported on a large scale as factories in China are often too small to compete on the world market. A plant that produces Methyl Alcohol, for example, would have to produce at least 300kt per year to be competitive, while Chinese plants regularly produce only 10kt per year.
3. Other notable areas of growth that drive the chemicals industry’s expansion include increased construction (urbanisation), automotive production, and shipbuilding.
4. The government is proactively reshaping the chemicals industry to be more value-added and environmental friendly. Some of the local specialty chemicals manufacturers, such as China National BlueStar Corporation, Transfar Group and Shanghai Chemspec Corporation will undergo accelerated growth in the next ten years as production of specialty chemicals increases, partly driven by the improving living quality in China, which requires for instance more dyestuff for textiles, scents for cosmetics and chemicals for pharmaceuticals.
5. China’s recent lackluster performance has for the most part been due to poor world economic performance. China is a key input-output engine for consumer goods. The types of chemicals required for construction may change as that shift continues, but the prospect for overall demand remains positive.
6. Personal consumption as a GDP component has been growing at a slightly elevated pace of about 8.7 percent per year over the past five years, but its impact is still small. In general, it seems likely that future chemical demand growth will be linked primarily to manufactured exports.
7. The overall construction market has grown steadily, and significant industrial infrastructure spending is still needed. So the types of chemicals required for construction may change as that shift continues causing the prospect for overall demand to remain positive.
THOUGHTS
1. Factors outside of China, such as continued recovery in Europe and the United States, and rising policy and political risks across the world, will be more critical to global economic health in the near term.
2. China’s bond market is still in its early stage of development. It will be essential for China to develop a market-based yield curve, ensure appropriate pricing for corporate risks, expand derivative and risk management tools, and cultivate institutional and foreign investors. Foreign ownership, currently less than 2%, could increase as China’s bond market gradually matures.
3. Future capital account liberalization, introduction of international credit rating standards, growth of China’s pension fund business, and the increasing size and diversity of the sovereign bond market (for example, the buildup of the municipal bond market) will help to address the challenges.
4. Limited production scale and low technology know-how are still the present hurdles for domestic players to tackle. In addition, pressure for better environmental treatment may drive up production costs. However, with state support for plant construction and desire from large foreign companies to set up base, these hurdles can be overcome
5. The slowing of the world economy is affecting China’s progress toward creating higher value goods. This will in turn affect the demand for specialty chemicals associated with those goods. Looking ahead, China’s growth in durable goods is likely to be less than rapid because of the high level of expertise in areas such as robotics and automation required to compete in the global durable goods arena.
(Source: Accenture, Fiducia Management, Vanguard)
