China’s economy was expected to drive a third of the world’s economic growth this year, which is why its dramatic slowdown in recent months is sounding alarms globally. Policymakers are bracing for a blow to their economies as China’s imports of everything from construction materials to electronics decline.

Caterpillar has reported that the Chinese demand for machinery used in construction sites is worse than previously thought. US President Joe Biden termed the economic woes a “ticking time bomb.” Global investors have already pulled out $10 billion from Chinese financial markets.

Asian economies have been hardest hit due to their trade links alongside African nations. Last week, central bankers from South Korea and Thailand lowered their growth forecasts, influenced by the outlook of the Chinese economy.

However, all is not gloomy. China’s slowdown will lead to a drop in global oil prices, and deflation in the country will result in lower prices for goods shipped worldwide. This benefits countries like the US and the UK, grappling with high inflation. This is the optimistic view of some analysts. The evolving geopolitics, such as forming an expanded BRICS, rapprochement between Saudi Arabia and Iran, or a unified international policy with Russia, should help maintain high energy and raw material prices.

Yet, as the world’s second-largest economy, a prolonged slowdown in China would harm rather than help the rest of the world. For every percentage point that China’s growth rate increases, global expansion is boosted by approximately 0.3 percentage points. China’s weight has become pivotal for global growth.

The value of Chinese imports has fallen for nine out of the last ten months, moving away from record levels reached during the pandemic. Shipments from Africa, Asia, and North America were lower in July than a year earlier.
Africa and Asia were hardest hit, with the value of imports dropping by over 14% in the first seven months of this year. This partly stems from a decreased demand for electronic components from South Korea and Taiwan, while spare parts prices are dropping. Commodities such as fossil fuels also weigh the value of goods shipped to China.

Producer prices in China have contracted over the past ten months, meaning the cost of goods shipped from the country is decreasing, which is positive in an inflationary context. However, the problem of US inflation is now linked to wages.

Chinese consumers are spending more on services, like travel and tourism, than goods, but they are not venturing abroad in large numbers. Only recently, group travel to many countries has been banned, and there is still a shortage of flights, making travel much more expensive than pre-pandemic. Furthermore, the pandemic and economic downturn have reduced incomes in China, and the prolonged housing market crisis means homeowners feel less affluent. This suggests it might take long for overseas travel to return to pre-pandemic levels, hitting Southeast Asian countries reliant on tourism, such as Thailand.

China’s economic troubles have caused its currency to drop by more than 5% against the dollar this year, with the yuan poised to cross the 7.3 mark. The central bank has stepped up its defense of the yuan through various measures, including daily currency fixing. The depreciation of the offshore yuan impacts its peers in Asia, Latin America, and the Central and Eastern European bloc more significantly. The weak sentiment could weigh on currencies like the Singapore dollar, Thai baht, and Mexican peso as correlations increase.

With the weakness in the Chinese economy, it’s tough to be optimistic about Asian economies and currencies. The downturn in the construction sector might hurt currencies of commodity-dominated economies, such as the Chilean peso and South African rand. The Australian dollar, often traded as a gauge for China, has lost over 3% this quarter, making it the worst performer in the Group of 10 basket.

Chinese interest rate cuts this year have lessened the appeal of its bonds for foreign investors, who have reduced their exposure to the market and are seeking alternatives in the rest of the region. Holdings abroad in Chinese sovereign notes make up the smallest share of the total market since 2019.

Companies, from Nike to Caterpillar, have reported declining profits due to China’s slowdown. The MSCI index tracking companies globally most exposed to China fell by 9.3% this month, nearly double the decline of the broader global equities index.

An indicator for European luxury goods and travel and leisure in Thailand also trails losses compared to the benchmark Chinese equities index. These sectors accurately reflect how global investors might indirectly expose themselves to China and the outlook as the Chinese economy continues to weigh down.
Luxury product firms like LVMH, Kering, and Hermes International are particularly vulnerable to fluctuations in Chinese demand.

The real question is whether this shift is past and already factored in or whether the phenomenon intensify.