This article first appeared in The Edge Malaysia Weekly on September 11, 2023 - September 17, 2023

MARKETS had been counting on a steadier recovery in China post-Covid-19 in order to lift economies globally, but key economic data from the country for July just confirmed the worst fears — that growth in the world’s second-largest economy is losing steam.

China’s retail sales growth slowed to 2.5% year on year in July from a growth of 3.1% y-o-y in the prior month, while industrial production grew a mere 3.7% in July compared with a 4.4% y-o-y increase the month before. Fixed asset investment, a key measure of capital spending, grew 3.4% y-o-y for the first seven months of this year compared with 3.8% y-o-y from January to June. Property sector indicators such as residential sales also saw slower growth for the first seven months of 2023.

Meanwhile,  China’s trade numbers for August released last week showed marginal improvements as exports and imports in renminbi value terms saw a smaller contraction in August at 3.2% y-o-y (-9.2% in July) and 1.6% y-o-y (-6.9% in July) respectively.

The Caixin China General Manufacturing Purchasing Managers’ Index (PMI), which is a survey of 500 manufacturing companies, rose to 51 points in August from 49.2 in July, exceeding expectations.

Economists see a stabilisation in China’s economic outlook, but have warned against being too quick to celebrate.

“While economic conditions are not expected to weaken further, there remain headwinds to China’s economic recovery, including high global interest rates, geopolitical tensions and the ongoing funding crisis at the domestic property developers,” says UOB Global Economics and Market Research in a report.

Stimulus measures to shore up the Chinese economy have been rolled out in recent months, but have not been quite the shot in the arm that markets had been expecting to see.

HSBC Greater China economist Erin Xin says while China’s recovery has lost some steam, she has been seeing more concerted effort by the government to provide support for the recovery.

“A key avenue has come through the recent property easing measures, which are likely to help bring back some homebuyer demand and lift sentiment. That said, it may still take time for the measures to take full effect, but we have seen some initial green shoots in demand in larger cities in China,” she says in an email reply to The Edge.

Apart from the recent measures for the troubled property sector, the government has cut key lending interest rates as well as provided tax relief measures for small businesses and rural households. There have also been targeted support measures to help boost consumption in durable goods such as electric vehicles and electronic appliances.

OCBC Bank chief economist Selena Ling says Chinese policymakers have been cautious in their approach to policy stimulus.

“It’s a question of magnitude — these measures are a step in the right direction, but fall short of the ‘policy bazooka’ that financial markets are hoping for. The Chinese government still has substantial foreign reserves and Chinese households still have healthy savings,” she explains in an email reply to The Edge.

Ling adds that some of the policy measures that have been rolled out will take time for their effects to be felt but this presents a challenge in itself because if a confidence crisis arises among Chinese consumers — for example, if they feel insecure about the job market, property market and geopolitics issues — it could continue to curb spending.

Asked whether there is any upside in the current conditions, Ling says: “Market expectations have been so beaten down that any upside surprise on economic data and/or more aggressive policy stimulus measures may see a knee-jerk rebound in sentiment, even though the challenges in the property market and geopolitics may take longer to resolve.”

In the US, recent economic data have signalled that conditions are softening, but still resilient. The wage increase has moderated and employment growth has cooled, suggesting to the market that the US Federal Reserve would have no urgency to embark on another rate hike at the next meeting. The Fed will announce on Sept 20 its decision on the benchmark interest rate.

“A soft landing appears to be what the market and the Fed are hoping for, but we shall see,” says Ling. She adds that an economic slowdown is inevitable, but could end up being a brief and shallow one instead of a sharp and prolonged downturn.

“If the US economy expands by only 0% to 0.5% in 2024 compared with about 2% this year, it would already feel like a recession to most households and businesses,” says Ling, commenting on whether she sees the US entering a recession in 2024.

Meanwhile, Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre executive director Lee Heng Guie opines that the lag effect of aggressive monetary tightening will eventually impact the US economy.

“It takes around 18 months for the full effect of rate hikes to make their way into the economy. Investors must continue to monitor inflation data, consumer sentiment and the labour market. The US PMI manufacturing is still contracting and mortgage applications have declined on higher mortgage rates,” he notes.

While many hope that the Fed is near the end of its rate hike cycle — which would mean some reprieve for emerging market currencies, including the ringgit — experts say to hang on to that thought.

Maybank Investment Bank Research in a Sept 1 report made a slight revision to its ringgit forecast beginning 4Q2023, whereby the currency pair forecast for 4Q2023 is now at 4.55 from 4.50 previously; 1Q2024 sees the ringgit at 4.45 to the US dollar from 4.35 previously, and 2Q2024 at 4.35 from 4.20 previously.

The revised forecast, says the research house, reflects recent market developments as well as a delay in recovery in China and factors in “high or higher” for longer US policy rates, which had kept the US dollar more elevated for longer going into end-2023.

“The recent renminbi support on the back of China market interventions and targeted stimulus-related factors have helped support regional currencies including the ringgit in July, but China growth concerns have weighed down regional currencies including the ringgit in August,” it notes.

OCBC Bank’s Ling believes that in the interim, the unfavourable external environment may still see the ringgit face some pressure. At the time of writing, the ringgit was trading at 4.68 against the greenback. At the start of the year, it was at 4.40.

Currency aside, the slower growth and weaker demand anticipated from the US and China are expected to weigh on Malaysia’s exports, particularly in 4Q2023, given that both countries are major trading partners of Malaysia, says Ling.

“This will be exacerbated by fading commodity tailwinds for palm oil and natural gas while rising global oil prices worsen Malaysia’s terms of trade. On the bright side, there are signs that the global electronics downcycle is bottoming, lifting Malaysia’s electronics exports for a third consecutive month to July 2023,” she adds.

China’s economic weakness could also impact Malaysia’s tourism numbers, given that visitors from China are a major tourist group for the country. In terms of number of arrivals, Malaysia saw 403,121 persons for the first five months of 2023 compared with 3.1 million persons over the same period in 2019, according to figures by Tourism Malaysia.

That means, as CGS-CIMB Research put it in its Sept 7 report, “the onus of Malaysia’s economic growth will lie further on the domestic economy, in which the catalysts remain limited to the tourism sector and strong labour market”. 

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