Wednesday 24 Apr 2024
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This article first appeared in The Edge Financial Daily on April 18, 2017

KUALA LUMPUR: The faster-than-expected 6.9% expansion in China’s economy in the first quarter (1Q) of 2017 — the strongest growth since 2015 — will benefit Malaysia given that China is Malaysia’s largest trading partner, according to economists.

The growth, which was above the consensus estimate of 6.8%, came about as higher government infrastructure spending and a frenzied property boom helped raise industrial output by the most in over two years.

Affin Hwang Investment Bank Bhd chief economist Alan Tan said the strong gross domestic product (GDP) growth is beneficial to Malaysia as it reflects a healthy domestic demand in China. “A combination of better external and domestic demand would mean that Malaysia should benefit not just from China’s demands for manufactured goods but also for Malaysia’s commodity-related products,” Tan told The Edge Financial Daily.

With China’s better-than-expected showing, Tan said Malaysia has an upside potential to achieve the upper end of Bank Negara Malaysia’s (BNM) forecast of 4.3% to 4.8% GDP growth.

Affin Hwang has maintained Malaysia’s GDP growth at 4.4% for 2017.

Socio-Economic Research Centre Sdn Bhd executive director Lee Heng Guie expressed similar sentiments, saying the better headline number suggests that China’s economy remains stable. “We know that China is still undergoing a structural change in its economy so that it will be more consumption-driven, and last year consensus had lower expectations,” said Lee. “With the 1Q numbers better than market consensus, it reflects the consolidation in China and that the economy remains strong.”

“Of course, it’s only the first quarter, so we have to wait and see if this could continue into the second half,” he said when contacted over the phone.  Lee added that if China maintains this steady growth, it will be positive for regional trade and investment, including for Malaysia.

CIMB economist Michelle Chia, however, views the latest GDP growth in China as being in line with the current economic environment but having limited impact. “It’s in line with the reality, but it’s not too much bigger than expectations. The numbers are definitely good, but it’s not a game changer,” said Chia.

She said that despite the faster-than-expected expansion in China, she is maintaining CIMB’s forecast for Malaysia’s GDP growth at 4.2%, which is lower than BNM’s forecast of between 4.3% to 4.8%. She shared that the lower forecast was mainly based on the expectation that private consumption growth will moderate to 5.8%. BNM had projected private consumption growth to expand by 6% in 2017.

“Inflation is on the rise, nominal wage growth is not as strong as last year, and the job market remains subdued,” Chia said of the factors that could lead to lower private consumption growth. She noted, however, that the export momentum seen in the 1Q as one of the positive signs for Malaysia’s economy, though it remains to be seen if such momentum could continue for the rest of the year.

Meanwhile, Lee shared that trade-related issues remain one of the key risks for the region, including China and Malaysia, and their impact hinges on the upcoming report on potential trade abuses.

The risk was also reflected in the just released HSBC Global Research report, based on the US Treasury Report.

“No country was labelled as a manipulator (currency manipulator), but the new report was more strongly worded than previous reports. We believe that by explicitly mentioning bilateral trade deficits, the US Treasury is highlighting the importance of the upcoming report on potential trade abuses to be led by US Secretary of Commerce Wilbur Ross,” it said.

US President Donald Trump had signed a pair of executive orders at the end of March, aimed at cracking down on trade abuses and identifying the causes of Washington’s massive trade deficit. That US report will study the reasons behind the trade deficits with 16 countries, which include China and Malaysia, and is due sometime in the 2Q of this year.

Tan agrees that the introduction of the anti-trade measures by Washington would affect Malaysia’s growth in 2017, but  said chances of the measures being implemented appear small after Trump recently toned down his calls for punitive measures against China.

“China is likely to avoid any type of tariff being imposed by [the] US as both countries have in recent days seen more common grounds to support the economy. Of course, it (US imposing tariff on China) remains a downside risk especially when the US trade-deficit report is completed. If that happens, China’s GDP growth could be below 6.5%,” he said.

Tan pointed out that Malaysia is likely to escape any form of punitive measures from the US. He, however, stressed that the geopolitical tension involving North Korea, the US and China is another potential risk that could dampen economic growth worldwide, including in Malaysia.

The tension revolves around North Korea’s nuclear affair, with Trump urging Chinese President Xi Jinping to stop the Pyongyang regime from developing more advanced nuclear weapons and ballistic missiles.

“While the risk is there, we also think that it (attack by the US on North Korea and vice versa) is unlikely to happen. We think that the US will seek a non-military diplomatic move from China with North Korea on the issues,” Tan said. Tan also said that China’s bloating debt level is a concern as it could lead to financial and banking risks.

“The issues that haunt China continue to remain — the bloating debt level, the overheating of the property sector … it’s just that with better economic growth, it will give some room for the Chinese authorities to address some of these issues,” Tan added.

On the impact of the better-than-expected Chinese GDP growth on Malaysia’s equity market, Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew said the impact would be limited. “The data is positive, but it’s not a forward-looking data so it has a limited impact. The market continues to expect the Chinese economy to slow down as it adjusts to a new economic model. This was despite the 1Q growth turning out to be better than consensus,” Pong said.

He said  the market remains jittery despite a better performance in the KLCI Index yesterday, closing higher by 0.17% or 2.94 points at 1,733.93. This, he said, is due to the geopolitical concern and tensions, a slowing economy and some negative signs in the US economy such as slower vehicle sales, property sales and decline in retail prices.

“At the moment, it’s safe to say that all the bullishness that people had when Trump became president is going to be reversed, as much of it has not turned out as expected,” he added.

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