PETALING JAYA: With domestic demand having emerged as a key driver of growth, Malaysia will be able to withstand any potential economic slowdown in China, which has set a growth target of around 5% for 2024.
Without the low-base effect of 2022 and in the absence of a burst of “revenge spending”, analysts said China’s ability to achieve its gross domestic product (GDP) target may be a challenge.
China’s growth target for this year surpasses the forecast by the International Monetary Fund, which predicts a 4.6% increase in China’s GDP, citing a real estate slump and weaker export demand as potential impediments.
TA Research said a potential slowdown in China’s economy poses the risk of diminishing demand for Malaysian exports, impacting critical sectors such as electronics, palm oil and natural resources.
Notably, as of 2023, China accounted for 17.1% of Malaysia’s total trade, with exports to China constituting 13.5%, while imports from China comprised 21.3%, the research firm said.
“For Malaysia, the disparity between China’s growth target does not immediately raise alarm bells. With more than 90% of its economic vitality rooted in domestic performance, Malaysia boasts a resilience that insulates it to a certain extent from external economic fluctuations.
“Acknowledging the modest slowdown projected for China and the prevailing uncertainty in the global economic landscape, we maintain our view of Malaysia and a GDP forecast for 2024 at 4.7%,” said TA Research in a report.
The research house said its observations indicate the correlation between Malaysia and China’s GDP from 2010 to 2019 (pre-pandemic) was relatively strong at 63.4%.
“However, a shift in the correlation, down to 20% for the period of 2010-2023, signals a change in the economic dynamics and relationship between the two countries.
“External shocks, particularly the divergent impacts of the Covid-19 on Malaysia and China, have likely contributed to this altered correlation. As we transition from the pandemic into a normalisation phase, there is a belief that the correlation may rebound to its optimal level,” the research house added.
Where foreign direct investments (FDI) are concerned, TA Research said Malaysia’s FDI rose to RM926.3bil in the fourth quarter of 2023 (4Q23) compared with RM914.9bil in 3Q23.
“China holds the seventh position, contributing 3.7% or RM34.5mil of the total FDI in Malaysia. This figure is notably lower than Singapore (RM207.7mil), Hong Kong (RM113.3mil), and the United States (RM97.4mil), which stand at 22.4%, 12.2%, and 10.5%, respectively, according to data from the Bank Negara.”
The research house said alterations in China’s GDP growth could resonate through investment decisions, particularly impacting sectors like real estate, manufacturing, and infrastructure in Malaysia.
Similarly, any slowdown or currency fluctuations in China could reshape the travel patterns of Chinese tourists, thereby impacting Malaysia’s tourism industry, which has traditionally enjoyed a significant influx from China.
In 2023, Chinese tourists numbered 1.47 million making China the fourth-largest source of tourism for Malaysia, after Singapore, Indonesia and Thailand.
Revenue from China’s tourists in 2019 was the second-highest, behind Singapore at RM15.32bil, TA Research noted.
Meanwhile, Maybank Investment Bank Research (Maybank IB Research) said China will need a stronger boost from net exports and investment to achieve its growth target of around 5%.
The research house expects GDP growth of 4.5% -5.5% will be “within policymakers’ comfort zone, while a number below may trigger more forceful policy measures”.
“The consumer price index (CPI) inflation target was set at 3%, a perennially steady objective. Given that headline inflation is currently negative, we expect it to average 1.1% in 2024.
“Although CPI inflation has fallen short of its target since 2012, maintaining the 3% goal should help anchor inflation expectations for businesses and households, and keep deflationary pressures at bay,” said Maybank IB Research.
In terms of macro policy, it noted that Beijing has signalled proactive fiscal policy moves but not a deluge of stimulus. As for monetary policy, it will play a less prominent role in 2024, with Beijing signalling a “prudent” stance.
