China’s Impact On Malaysia

I’ll be going on leave for a short break during these school holidays, so there won’t be any further posts until the middle of next week. In the meantime, I’m making a note on a briefing held yesterday by the World Bank on China’s long term prospects and the consequences for Malaysia.

Since it was a closed door session and the their report on China was the subject of some controversy, we’re not supposed to talk about the China portion of the presentation. Suffice to say that the report and its recommendations are freely available through the World Bank’s website (link here). My only comment on this is to repeat what we were told – in detail, the report broadly mirrors the proposals of our own New Economic Model.

The key takeaways (from my perspective anyway and going from memory):

1. China has had an enormous role in raising commodity prices over the past decade, from which Malaysia has benefited.
2. This has offset the competition created for our own manufactured exports, at least in terms of trade volume.
3. The increase in secular demand from China (and to a lesser extent India in my opinion), suggests over the medium term commodity prices will continue to be elevated. However, China’s development path will mean changing patterns of demand for Malaysian commodities over time. Whether we will continue to benefit from higher commodity terms of trade remains to be seen.
4. The changing wage patterns in China means that low wage manufacturing will shift inland, or be taken over by other low cost manufacturing bases; the alternative is rising global prices of manufactured goods – a reversal of the “China” effect on global inflation.
5. As a middle income country, the challenges facing China are the same as those facing Malaysia – upgrading skills, going up the value-chain, improving domestic demand. As such there is not only trade competition, but also “policy” competition. Benefits will accrue first to those who can implement structural reforms the fastest.
6. Coming back to the commodity issue, high commodity prices puts Malaysia at risk of “Dutch disease”. There’s little evidence of it so far from movements in real exchange rates in the past decade. My understanding of Dutch disease is that it also manifests itself in reduced investment in manufacturing and services, though it would be tough to disentangle the impact of higher commodity prices against higher competition in manufacturing that China brings to the table. We do see reduced FDI as well as lower private investment growth – perhaps the impact of higher commodity terms of trade on the exchange rate has been ameliorated by reduced manufacturing competitiveness?
7. I think this reinforces what I’ve thought for a long while now. China matters more to us now than the US does, and this will be reinforced over the next few years.
8. Longer term, as China moves up the income ladder (its currently adding the equivalent of the economy of South Korea every year), growth will slow, which will create a growth challenge for Malaysian exports and domestic economy