China, the world’s biggest economy, grew by just 0.4% in the second quarter of 2022, its weakest growth since the pandemic in 2020. This is largely owing to the Chinese government’s zero-Covid policy, which has led to lockdowns in several large cities including Shenzhen, Shanghai, and Beijing.
As Malaysia’s biggest trading partner, a slowdown in China has repercussions for certain local sectors and companies. Here is a rundown using data from 2020 obtained from the Observatory of Economic Complexity, which tracks and publishes export and import data from countries all over the world.
1. Electronics and electrical
Malaysia’s exports to China made up US$108 billion or 40.4% of its total exports in 2020. Of this, electronics and electrical products comprised around US$15.8 billion, or 40.8% of total exports to China.
An economic slowdown in what is essentially “the factory of the world” would lead to less demand, which in turn would negatively affect local companies that heavily export such products.
The KL Technology Index – a proxy to the electrical and electronics sector – declined by 20.9% since the end of March, when lockdowns were imposed in China to curb the wave of Covid-19 cases.
2. Oil and gas
Malaysia traditionally exports a significant proportion of oil and gas, accounting for about 11% of total exports in 2020.
China, which imports about 9.6% of Malaysia’s oil and gas products, accounted for 7% of Petronas’ revenue last year, behind Japan (8%), Europe (9%), Singapore (12%), Africa (12%), and Malaysia itself (27%).
The KL Energy index, which proxies the local oil and gas sector, declined by 11.9% from March to last month, despite high crude oil and gas prices.
3. Metals
This sector in Malaysia consists of iron and steel, aluminium, copper, zinc, nickel, and other metals, and accounted for about 12% of Malaysian exports to China in 2020.
With a population of 1.4 billion, China still has a long way to go in terms of building infrastructure to accommodate its population, hence requiring large amounts of raw materials for construction.
About US$2.2 billion or 42.8% of Malaysia’s exports of iron and steel went to China, while exports of aluminium amounted to US$1.3 billion or 34.9% of overall aluminium exports.
Likewise with the electrical and oil and gas sector, local investors should keep track of the performance of these raw-metal companies as China’s demand is a key factor towards their financial performance. The KL Industrial Product Index, which proxies the metal sector, declined by 14.1% from March to July.
4. Palm oil
Malaysia and Indonesia are the top producers of palm oil in the world, with Indonesia the biggest and Malaysia in second place. In 2020, Malaysia exported the most palm oil to India and China, at about 15.5% and 11.2%, respectively, out of the country’s total exports from this sector.
Palm oil exports were worth about US$1.2 billion, representing 3.1% of total Malaysian exports to China.
As palm oil companies form a key part of the Malaysian economy, investors should do well in monitoring demand when China undergoes an economic slowdown. The KL Plantation Index, which proxies the palm oil sector, declined by 13.3% from March to last month.
This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.
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