Jul 5, 2014

Malaysia - Consider China Risk To Malaysia’s Economic Growth, Warns Report

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KUALA LUMPUR— Malaysia’s steady pace of economic growth may unravel if China, the world’s second-biggest economy, slows faster than expected , a report in the Financial Times warned.

Citing Moody’s Investor Service, the paper said the entire Southeast Asian region, including Malaysia, was vulnerable to a sharp economic slowdown in China.

That’s because China’s role in the economies of the region had risen sharply, it said, pointing to data showing that 12.2 per cent of Asean’s total exports went to China in 2013, up from 7.3 per cent a decade earlier.

The situation looks even starker if Malaysia is singled out.

Data from the Statistics Department shows that China is Malaysia’s biggest trading partner. Total trade between the countries reached just over RM200 billion in 2013, a 12.5 per cent increase from the previous year.

Should China’s manufacturing-heavy economy falters, its demand for Malaysia’s exports will fall away. The sharper the slowdown, the bigger the potential dent on Malaysia’s exports.

China’s breakneck economic growth is already slowing. In the first quarter of 2014, growth was the slowest in 18 months.

In recent months the possibility of a banking crisis in China, caused by a poorly regulated shadow banking sector, is muddying the economic outlook for the country.

While unprecedented strength in domestic demand was helping Asean economies grow, there was a need to also consider the area’s increased linkages to China, the Financial Times said in its report.

In Malaysia, strong domestic demand has driven the economy and according to the central bank will continue to underpin growth.

But the sturdy domestic demand has come alongside a steep increase in household debt. At 85 per cent of the entire economy in 2013, Malaysia’s household debt burden is among the largest in Asia.

This large burden could be a telling factor if the economy slows and interest rates rise, putting an end to the days of free spending.

Some may start to default on loan repayments but many more will have to start watching their spending habits — a factor that will weigh on domestic demand.

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