- Tighter regulations are creating economic headwinds in China, particularly in property and energy.
- Morgan Stanley said Asian economies are most exposed, followed by commodities giants such as Russia.
- The bank found that the US should suffer little, given that trade is not a major part of its economy.
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The Chinese government is tightening regulations on property and pollution and it’s shaking the country’s economy.
Rules limiting debt in the property sector have been a key factor in the looming default of giant developer Evergrande. And crackdowns on pollution have led to reductions in coal production, worsening an energy crunch and power shortages.
In a note this week, analysts at Morgan Stanley weighed up which countries are likely to be most impacted by a slowdown in the world’s second-biggest economy and largest trading nation.
“With a global trade share of 13.6%, changes in demand of the world’s second-largest economy will reverberate through the global supply chain,” the analysts, led by chief global economist Seth Carpenter, said.
The most-exposed economies are in Asia, Morgan Stanley said. They’re followed by countries that are key commodities suppliers such as Russia, as well as European Union countries who are closely linked through global trade.
“The US ranks as one of the least exposed economies in our analysis,” the analysts wrote.
Chinese slowdown to hit Asian economies
Close neighbours South Korea and Taiwan are likely to be hit hardest by any slowdown in China, with Asia’s economy suffering as a whole from lower Chinese demand and production disruptions.
Morgan Stanley thinks China’s growth from 2022 to 2025 is likely to be on average 0.4 percentage points lower each year than previously expected. Such a decline would likely drag on Taiwan and South Korea’s growth by just over 0.1 percentage points per year.
Yet in Morgan Stanley’s more pessimistic scenario, investment slows sharply and Chinese growth is 1.2 percentage points lower on average a year. In such a case, the impact on Asia’s economy would be considerably bigger.
Commodities exporters feel the heat
Russia, Norway and South Africa are also likely to be hit by lower Chinese growth, Morgan Stanley said. In this case, the main problem will be that production cuts in China lead to lower demand for global commodities.
In 2020, Russia was one of the top two oil suppliers to China, providing 16% of its crude oil, while South Africa is a key industrial metals exporter.
Europe’s supply links leave it exposed
European countries have different exposures to China, meaning a slowdown would have a varying impact. Morgan Stanley said that Germany – which is a net exporter to China – would be one of the most exposed European countries.
Investment is also a key area to consider. Germany and France are relatively big investors in China, which could leave them more exposed to a slowdown.
US is one of the least exposed
Although China is one of the US’s biggest trading partners, trade doesn’t make up a large share of the US economy. For that reason, China’s economic wobble is likely to have “limited headwinds” for the US, Morgan Stanley said.
Morgan Stanley said that knock-on effects from China’s slowdown, such as higher bond yields around the world, could also hit economies. But it said the US would be one of the least affected, especially as it has the Federal Reserve in its corner.