Manufacturing Effect

China has turned into a force to be reckon with in the context of the global economy, and in the
event of an economy slowdown, it would inevitably affect the rest of the world. As of year 2014,
China is the largest exporter and the second largest importer of goods and services in the world
(The Observatory of Economic Complexity, 2014). Given the circumstances, its slowdown in
growth of GDP could lead to a ripple effect towards the world economy and various sectors.

Meanwhile, the economic slowdown in China (Malaysias top trading partner) saw an overall
decline in domestic consumption that led to a drop in Malaysias primary exports to China.

Looking in the context of Malaysia, China is also the second largest importer in which it accounts
for 13.1% of Malaysias overall exports in 2015. Due to that, the slowdown in China has drastically
hurt the exports value of Malaysia.

From 2015 to 2016, the total exports to China has decreased RM6.3 billion from RM74.2 billion
to RM67.9 billion, a decrease of 8.5% in the span of 1 year (Malaysia External Trade Development
Corporation, 2012) Besides that, the falling commodity prices, especially oil prices, had taken a
huge toll on Malaysian economy. Since oil is one of Malaysias major exports and source of
revenue, the plunge of oil prices had not only impacted on the GDP rates (due to the reduction in
value of exports), it also caused the Malaysian currency to depreciate. Even though the fall of oil
prices and the slowdown of exports cannot be cited as the sole reasons for the depreciation of
Malaysian Ringgit, the movements of major economies in the world, in this case, China, will lead
to chain reactions towards the economy of Malaysia.

However, Chinas growing importance as a market for exports from its ASEAN neighbours has
increased their vulnerability to a Chinese economic slowdown. The pace of Chinese economic
growth has moderated in recent years, falling from 10.6% in 2010 to 6.9% in 2015, and is forecast
to ease further to around 6.5% in 2016. The medium-term outlook for Chinese economic growth
is for growth momentum to stabilise at a pace of around 6.5% per year.

While this will continue to make China a key growth engine for the global economy, the Chinese
economy is undergoing a fundamental structural change and transformation.
The manufacturing sector, which had been a key growth engine of the Chinese economy for
decades, is undergoing adjustment and rationalisation due to overcapacity in some key industries
as well as the gradual decline in competitiveness of low-cost manufacturing.

Chinas overall industrial production growth rate in 2015 was just 6.1% year-on-year (YoY), less
than half the long-term annual average industrial production growth rate of 12.7% over 1990-2015.

Meanwhile, consumption is becoming an increasingly important growth driver, contributing an

estimated 58% of GDP growth in 2015. The continued rapid growth in Chinese consumer spending
is expected to fuel rapid growth in many sectors of services, including financial services,
healthcare, retail trade and logistics.

The impact of the slowdown in Chinas manufacturing sector has had significant negative effects
on the East Asian manufacturing supply chain, with many Asian economies recording large
declines in their total exports during the last 12 months, particularly to China.

The external factors comprising the oil price plunge, Chinas economic slowdown and foreign
capital outflows. According to analysts, global crude oil prices have plummeted by over 50% since
June 2014 due to oversupply and weak demand. Palm oil prices were also on the decline. Malaysia
is hit because oil-related industries account for a third of its revenue and the country is also the
worlds second largest palm oil producer. All that narrowed its trade surplus and led to currency
weakening issues like other commodities-exporting countries.
References

Kam, K. X. (2017, June 11). Rise of Chinas economy. Retrieved November 24, 2017, from
http://www.flymalaysia.org/chinas-impact-global-economy/

P, A. (2016, February 11). Https://www.thestar.com.my/business/business-

news/2016/02/11/chinas-slowdown-to-continue-hurting-exports/. Retrieved November 24, 2017,
from https://www.thestar.com.my/business/business-news/2016/02/11/chinas-slowdown-to-
continue-hurting-exports/

Sani, I. (2017, August 4). China is leading manufacturing investments in Malaysia. Retrieved
November 24, 2017, from http://english.astroawani.com/business-news/china-leading-
manufacturing-investments-malaysia-151413

The impact of Chinas slowdown on Malaysia and Asean. (2017, April 3). Retrieved November
24, 2017, from https://themalaysianreserve.com/2017/04/03/the-impact-of-chinas-slowdown-on-
malaysia-and-asean/