Euro crisis: a hard landing for China?

Euro crisis: a hard landing for China?

(REUTERS/Paolo Bona)

Jakarta (ANTARA News) - The success of China`s economy has stolen the world`s attention with its spectacular double digit growth in three decades. As an Asian country that remains holding communist socialist concept, China has successfully implemented market economy which is liberal-economy`s identity.

Joining the World Trade Organization in 2001, China has extended their trade activity and transformed to be more integrated with world`s economy. With 1350 million people, China`s economy is driven by domestic consumption.

China`s economy slowdown due to European sovereign debt and tight monetary policy urged the China government to decrease its economic growth target to 7.5 percent in 2012. It raises concern of hard landing in China.

This concern could be identified by China`s growth in Q1-2012 by 8.1 percent year on year (YoY), significantly slower than Q4-2011 at 8.9 percent YoY. The Q1-2012 figure was the worst since Q1-2009. This slowdown is most likely caused by weakening domestic and foreign demand, investment and declining exports.

The sovereign debt crisis affects China`s economy both on the financial and trade market. In the financial market, the European crisis could influence stock and bond prices by contagion effects due to capital outflow and de-leveraging from European countries.

In the international trade side, China`s economic slowdown is triggered by decelerating export to Europe due to effects of fiscal consolidation and Euro depreciation. The fiscal consolidation in Europe is influenced by decreasing government spending which leads to a decrease in private consumption.

On the other hand, the sovereign debt crisis has affected Euro depreciation that leads to expensive import products from the Euro area. The combination of fiscal consolidation and Euro depreciation leads to a decrease in export exposures of China and other emerging countries to Europe.

The impact of the European crisis in the financial market is predicted to be relatively small. The European crisis which affected prices in Europe and the US financial market has also affected stock and bond prices in China.

However, high level of investment and market confidence on China`s capital market leads to stable Shanghai Stock Exchange`s performance.

Moreover, high level of domestic market in China is predicted to be a `magnet` factor to Foreign Direct Investment (FDI) in China.

Although FDI has been decreasing in 2009 due to the US crisis, the Fixed Asset Investment came up with investment driver.

On the trade sector, the worsening Europe economic condition and not-fully-recovered US economy also affected a decrease in China`s export.

Due to the sovereign crisis in Europe, China`s export performance is also declining, and even has been contracted in Q1-2011 and Q1-2012 thanks to Hong Kong, ASEAN, Japan and other emerging countries that still imported from China.

Meanwhile, the export exposures to Europe and the US are decreasing. In 2008 the US crisis has encouraged China to shift their export destination to Asia. Being absorbed by Asian market, China`s export is still supported by positive growth in Asia and improving inter-Asia trade following the implementation of the China ASEAN Free Trade Agreement (CAFTA) in 2009.

Effects of China`s economic slowdown on Indonesia

In the last few years, China continually has been receiving pressure from the United States to strengthen its Yuan to minimize the trade deficit between the US and China. China`s power has driven export which generates foreign reserves of US$ 1.3 trillion, the biggest in the world.

However, China`s export performance has been weakening since January 2012 when the export growth was exceeded by import growth. This declining performance continued in February 2012, and for the first time since last two decades China`s trade deficit has reached its lowest at US$ 31.6 billion. This was mainly caused by declining Europe`s demand.

China`s deteriorating trade performance becomes a rational reason to revise down its economic growth projection. Moreover, China has devalued its currency by 8.7% to 6.2875 per US$ compared to the last two years.

China implements a controlled floating exchange rate system with a range of 0.5% of mean of the exchange rate. Looking at China`s export-import in the last two 2 months, we must be aware of the implications of these China`s declining trade especially to Indonesia`s export.

When the US economy was shrinking in 2008-2011, the government of Indonesia estimated that exports will not be affected much. Likewise with the potential economic contraction in EU as the sovereign debt crisis emerged since 2010, Indonesia`s export will not be affected as well.

This seems to be true since export exposures tend to be increasing since 2009 amid the US and EU slowdown thanks to China as our major trading partner. And now when China is the source of the problem, the government needs to do serious precautions.

In the China-Asian Free Trade Agreement(C-AFTA) development in the last 2 years, the export-import performance of Indonesia has been increasing significantly. Exports grew by 35.5 percent YoY in 2010 and by 28.9 percent in 2011,, meanwhile import also grew faster by 40.1 percent YoY in 2010 and by 30.8 percent in 2011.

However, the trade balance is still positive, with decreasing surplus. With weakening demand from EU, Indonesia becomes China`s market target both low-end and high-end consumer goods.

Moreover, at the same time, Indonesia`s GDP per capita keeps increasing followed by increasing number of medium-high level people. China`s penetration to Indonesia is inevitable due to the FTA framework.

In the export side, China`s slowdown becomes direct thread for Indonesia`s export. China is one of major export destination countries for commodities and mineral products. Coal and crude palm oil exports would be threatened by China`s weakening demand.

China, the third biggest after India and EU for CPO exports, took 20 percent of the total CPO exports. Meanwhile, coal export to China is approximately at 24 percent of the total coal exports. Since January 2012, the export of those two commodities has been declining due to decreasing China`s imports. Moreover in the last 5 months, the export recorded monthly negative growth.

Going forward, China`s economic slowdown is expected to be temporary and recovering soon, as well as Indonesia`s export. Furthermore, the government is expected to extend export destination countries so that export is not dependent on existing countries.

The government policy that urges shifting from up-stream to down-stream industry is highly needed for example requirement of smelter development in factory in order to create value-added.

The export competency in the Asian region should be improved with any efficiency effort reducing high cost economy.

In the import side, the government is expected to manage and protect domestic market amid the C-AFTA un-flexibility. In the future, it is expected that the domestic products could `compete` with low-cost imported products which eventually strengthen and promote economic growth.

Joshua Pardede is an economist with PT BNI Security