Spillovers From China to Thailand and Other Asean-5 Countries1
The Chinese economy is transitioning to a new model, with slower growth and rebalancing in its drivers. Thailand is exposed to the slowdown, as China is one of Thailand’s main trading partners. Model estimates suggest that a one percent decline in China’s GDP lowers Thailand’s output by about 0.2 percent. The impact may be larger if China’s transition triggers financial market volatility. On the other hand, rebalancing from investment- to consumption-led growth in China is likely to be broadly neutral for Thailand, while the rapid growth in Chinese tourism has benefited Thailand.
1. The Chinese economy is transitioning to a new model, with slower but more sustainable growth, in which market forces are expected to play a more decisive role. The shares of investment and manufacturing in GDP are falling, while those of consumption and services are increasing (Figure 1). China’s trade has also contracted, with both exports and, even more so, imports declining substantially in 2015 (Figure 2). Given the large size of China’s economy, its slowdown and rebalancing, as well as the contraction in trade, can have significant spillovers to China’s trading partners, including those in Asia.
Figure 1.China: Real GDP Growth by Sector
Sources: China, National Bureau of Statistics; and Staff estimates.
Figure 2.China: Growth of Exports and Imports
Sources: China Customs; and staff estimates.
2. The transition in China has also resulted in bouts of global financial volatility. In particular, the VIX spiked in August 2015 (Figure 3), when China’s stock market collapsed despite official support, and when the renminbi fixing mechanism was adjusted to make it more market-based, leading in the first instance to renminbi depreciation vis-à-vis the U.S. dollar. The VIX spiked again in January 2016 on renewed concerns about the prospects of the Chinese economy. These bouts of volatility have led to capital outflows and currency depreciation in many emerging markets (Figure 4), highlighting another channel of spillovers from China to the world economy.
Figure 3.CBOE Market Volatility Index (VIX)
Source: Chicago Board Options Exchange.
Figure 4.Depreciation Against the U.S. Dollar between Aug. 3 and Sep. 30
Sources: Haver Analytics; and IMF staff calculations.
B. Spillover Channels
3. The impact of China’s transition on the rest of the world transmits primarily through commodity price and trade channels and can be amplified via financial channels.
Commodity Price Channel
4. The fall in global oil prices, partly triggered by China’s slowdown and rebalancing, is a positive development for Thailand. China is an important commodity producer, but its demand for commodities exceeds domestic supply. For example, China accounts for about 50 percent of global demand for base metals. Lower actual and expected growth of China’s economy (and investment in particular)—along with increasing supply—has put downward pressure on the prices of fuel (including oil and coal), metals, and agricultural products such as rice and rubber (Figure 5). This has had a negative impact on the terms of trade of the ASEAN–5 net commodity exporters—Indonesia and Malaysia (Figure 6). On the other hand, the terms of trade have improved for the Philippines, Singapore, and Thailand, which are net commodity importers (Figure 7). However, the negative shock for commodity exporters all over the world has partially spilled over to their trading partners (including the ASEAN–5) via lower demand and depreciated currencies.
Figure 5.Selected Commodity Price Indexes
Source: IMF, World Economic Outlook database.
Figure 6.ASEAN–5: Change in Terms of Trade
Sources: Country authorities; and IMF staff calculations.
Figure 7.Net Commodity Exports
Sources: UN Comtrade; and IMF staff calculations.
5. Since late 2014, China’s imports have been contracting in double digits in value terms. To a significant extent, this reflects lower commodity prices, but import volumes have declined as well (Figure 8). China’s share in exports is broadly constant across all ASEAN–5 economies, and thus exposure of the ASEAN–5 economies to import demand from China varies roughly with their trade openness (Figure 9). Correspondingly, Indonesia and the Philippines are the least exposed, Singapore is the most exposed, and Malaysia and Thailand are in the middle range—with exports to China for the latter two countries between 6 and 8 percent of GDP (Figure 10). It should be noted that for the ASEAN–5 economies China is not a dominant, and for some of them, not the most important trading partner. Indeed, the share of exports of the ASEAN–5 countries to other ASEAN–5 is as large or larger than the share of exports to China.
Figure 8.China: Import Volume Growth
Source: IMF staff calculations.
Figure 9.Composition of Exports of Goods by Trading Partners, 2014 Figure 10.ASEAN–5: Exports to China, 2014
Sources: Country authorities; and staff estimates.
6. Value-added trade data provides a complementary perspective. The value added embedded in exports for China’s final demand is highest in Malaysia (8 percent of GDP in 2011, last year with available value-added data), indicating its considerable exposure to changes in China’s domestic demand (Figure 11). Thailand’s exposure is smaller—5 percent of GDP in 2011—but has grown over time. It should also be noted that in contrast to the rest of the ASEAN–5, in Thailand value-added embedded in exports destined for China’s consumption is slightly higher than for investment (Figure 12). Thus rebalancing from investment to consumption in China could be a positive development for Thailand.
Figure 11.Value-Added Embedded in China’s Domestic Demand
Sources: OECD, TiVA database; and IMF staff estimates.
Figure 12.Share of Domestic Value Added Used for China’s Consumption and Investment
Sources: OECD, TiVA database; and IMF staff estimates.
7. Importantly, it is not just China’s final demand that matters for ASEAN–5. Given China’s role as a final assembly point in global value chains, a decline in China’s exports (e.g., because of an increase in production cost) would have repercussions down the supply chain. Should final assembly of certain goods be moved elsewhere, the supply chains might shift as well. Here again, Malaysia would be the most vulnerable, but Thailand’s exposure is non-trivial at almost 3 percent of GDP (Figure 13). Finally, both exports for China’s domestic demand and inputs into China’s export production are vulnerable to onshoring—a shift toward domestic production of final and particularly intermediate goods in China. As was the case for gross exports, value-added exposures to other ASEAN–5 domestic demand and exports are comparable to that to China, although they are mostly smaller and have generally not exhibited a trend increase (Figure 14).
Figure 13.Value-Added Embedded in China’s Exports
Sources: OECD, TiVA database; and IMF staff estimates.
Figure 14.Value-Added Exported to or via ASEAN–5
8. Export value growth turned sharply negative in all of ASEAN–5 in mid- to late-2014. Except for Thailand—where export growth was negative for much of the preceding period as well, thus lowering the base—declines reached double digits (Figure 15). It should be noted, however, that except for the Philippines, exports to China account for a relatively small portion of the overall decline in export growth, particularly in the second half of 2015. The fall in exports to their ASEAN–5 partners has played a bigger role; it appears that the ASEAN–5 countries are pulling one another down. To some extent the decline in inter-ASEAN–5 exports might be due to an indirect effect of the China shock, including through global value chains, but it is hard to attribute all of it to China.2
Figure 15.ASEAN–5: Export Values Growth Contribution by Destination
9. Lower commodity prices explain only part of the export value decline. Export volume growth has turned negative in Thailand and several other ASEAN–5 economies (Figure 16). In terms of value, it was not only commodity exports that suffered—exports of manufacturing goods have declined in all of ASEAN–5 (Figure 17).3
Figure 16.ASEAN–5: Export Volume Growth
Sources: Country authorities and IMF staff calculations.
Figure 17.ASEAN–4: Export Values Growth Contribution by Sector
10. Examining sectoral numbers in greater detail offers further insights. Drilling deeper at a disaggregated level for the three countries where data is available (Malaysia, the Philippines, and Thailand), preliminary analysis indicates that exports to China underperformed relative to exports to other countries for those goods where China is already an important customer, but they fared better for non-traditional exports. The ASEAN–5 may be losing market share in its traditional exports to China, including but not limited to commodities, while gaining in other areas, offering some evidence of a differential effect of rebalancing across industries.
11. Thailand stands to benefit from strong growth in China’s tourism. Unlike goods imports, imports of services have been growing in China (Figure 18). Among them, travel has become the dominant category. In 2015, service imports equaled a quarter of goods imports. Travel payments constituted almost 60 percent of all service debits, amounting to 2.3 percent of GDP. Thailand stands out among the ASEAN–5 as the country with the highest travel receipts (relative to the size of the economy) and the largest (and fastest-growing) share of tourists from China (Figures 19 and 20).
Figure 18.China: Imports of Goods and Services
Sources: China, State Administration of Foreign Exchange; and IMF staff estimates.
Figure 19.ASEAN–5: Travel Receipts
Sources: Haver Data Analytics; and IMF staff calculations.
12. Except for Singapore, residents of ASEAN–5 have limited direct exposure to a decline in China’s asset prices or a pullback of Chinese investors from their countries. Bilateral linkages between China and Singapore via portfolio and FDI are quite high (although a material fraction of money invested in China via Singapore may originate in other countries). For the other ASEAN–5 countries, the stocks of FDI and portfolio investment in China are less than 1 percent of GDP, while the stock of China’s FDI exceeds 1 percent of GDP only in Malaysia (Figure 21).
Figure 21.ASEAN–5: Direct Financial Exposure to China, 2014
13. Thus, the main concern is the impact of developments in China on global financial conditions, which in turn affect local conditions in ASEAN–5. Capital flows to the ASEAN–5, including Thailand, exhibit high negative correlation with the VIX (Figure 22). The spike in risk aversion prompted by the events in August triggered capital outflows, exchange rate depreciation, and stock market declines in all the ASEAN–5 countries (Figure 23). Indonesia also saw a spike in bond yields. Indonesia, and especially Malaysia, experienced the largest pressures on their currencies. In addition to global risk aversion, the impact on ASEAN–5 currencies may have reflected concerns about China gaining competitive advantage via renminbi depreciation, and idiosyncratic factors such as declines in commodity prices for commodity exporters and political uncertainty in Malaysia.
Figure 22.Thailand: Net Nonresident Portfolio Purchases and US Equity Market Volatility
Sources: Bank of Thailand; Chicago Board Options Exchange; Stock Exchange of Thailand; Thai Bond Market Association; and IMF staff calculations.
Figure 23.ASEAN–5: Exchange Rates and Domestic Financial Conditions
C. Quantification of Spillovers
14. A Global Vector Autoregression (GVAR) model is used to investigate how shocks to China’s GDP and global financial conditions are transmitted to the ASEAN–5.4 The model takes into account trade and financial linkages among countries. It includes an endogenous response of the oil price, amplifying the effect of China’s slowdown on fuel exporters and attenuating the impact on oil importers.5
15. Lower growth in China would have substantial spillovers to Thailand, although smaller than to Malaysia or Singapore. According to the estimates, a permanent one percent decline in China’s real GDP would reduce the oil price by about 3 percent. After one year, it would reduce output in Indonesia, Malaysia, Singapore and Thailand by 0.2-0.3 percent, with Thailand benefitting from a terms-of-trade improvement that partially offsets the contraction in external demand (Figure 24).
Figure 24.Average GDP Response over the First Year Following a Negative GDP Shock in China
Sources: IMF staff estimates; and Cashin and others (2016).
Note: Shows the percent change in GDP of each country associated with 1 percent permanent decline in China’s GDP, together with the 16th abd 84th percentile error bands.
16. A concomitant spike in global financial market volatility would aggravate the situation. If a shock to China’s GDP were combined with tighter financial conditions, the impact in most countries would be significantly larger. Figure 25 reports the average output responses to a one standard deviation increase in financial stress index over the first year,6 together with the 16th and 84th percentile error bands. The results show that there is significant heterogeneity across countries in terms of their impulse responses. In ASEAN–5 countries, output falls between 0.2 and 0.5 percent below the pre-shock level, with these effects being statistically significant for all these countries, operating though trade and financial linkages. The impact on commodity exporters is exacerbated by an endogenous oil price decline (about 6.5 percent in the first quarter).
Figure 25.Average GDP Responses to an Increase in Global Financial Market Volatility over the First Year
Source: IMF staff estimates; and Cashin and others (2016).
Note: Shows the percent change in GDP of each country associated with 1 standard deviation increase in the financial stress index, together with the 16th abd 84th percentile error bands.
17. In summary, the impact of China’s transition on Thailand and other ASEAN–5 is significant, but not overwhelming. Thailand’s elasticity to China’s GDP growth is about 0.2—somewhat lower than for most other ASEAN–5 economies. Moreover, unlike them, Thailand may not be adversely affected by rebalancing from investment to consumption in China, and it will continue gaining from rapid growth in Chinese tourism. Thailand’s financial markets have weathered relatively well bouts of financial volatility triggered by events in China in mid-2015 and early this year. On the other hand, merchandise exports declined in 2015 both in U.S. dollars and in real terms. Exports to China fell roughly as much (in percentage terms) as exports to the rest of the world. Intra-regional exports within the ASEAN–5 dropped considerably more than exports to China.
CashinP.MohaddesK.RaissiM.2016 “China’s Slowdown and Global Financial Market Volatility: Is World Growth Losing Out?” IMF Working Paper16/63 (Washington: International Monetary Fund).