China: The slowdown in China

The slowdown in China is hitting export-dependent emerging economies hard. It is those that planned for the bad times during the good, however, that will suffer the least.

Twenty-five % of Chilean exports go to China. In Brazil and Peru the figure is 15% to 20%. Indonesia, Malaysia, the Philippines, Thailand, South Africa and Colombia have between 10% to 15% of their exports going to the Asian behemoth. Small wonder again that a slowdown in China has such an impact in Latin America and south-east Asia.

The above figures come from a table put together by Société Générale cross investment research (August 24 edition). The table as well shows net exports of commodities as a % of gross domestic product (GDP) which gives an extra take on nations that will be hard hit by a China/commodities slowdown. On this inventory, Russia and Nigeria are vulnerable with between 10% and 20% of GDP accounted for by net exports of commodities.

While emerging markets can hardly be blamed for taking chance of China’s strong increase over the completed decade, the extent to which they have failed to move beyond commodity dependency is concerning.

The developing country malaise was always based round the fact that they exported raw commodities to the advanced nations that processed them and sold them back as manufactured goods. They therefore failed to gain the productivity and price-added advantages of a manufacturing-based economy. All that seems to have happened since this scenario of the 1960s and 1970s is that China has been substituted for the US as the export market.

Clearly the reality is additional complex than this. Some emerging markets, particularly those in south-east Asia, have made great strides in manufacturing, although sometimes they are part of a supply chain of which the final part is guess where? China.

But a downturn is at the same time as a country really tests out its economic model and finds out whether it is sustainable or not. By the same route, the eurozone has discovered that its model is deeply flawed.

Brazil and Russia are two nations that failed to take chance of the boom times to carry out proper reforms and are presently paying the price. Brazil failed to rein its bloated public sector and stamp out corruption, Russia has failed to diversify its economy away from oil. The moral of the story, which is almost at no time heeded, is – do reforms in good times.