The IMF believes that the most heavily exposed emerging market economies which will be impacted by lower China growth are those within the Asian regional supply chain, such as Philippines, Thailand, Korea, Malaysia, and Taiwan.
From IMF section entitled How Would an Investment Slowdown in China Affect Other Emerging Market and Developing Economies? beginning on page 36:
This box explores the potential impact of an investment slowdown in China on growth in other emerging market and developing economies. China’s growth model has become increasingly dependent on investment during the past decade.
Investment contributed about one-half of China’s GDP growth in the first decade of the 2000s, with particularly large contributions toward the end of the decade (Figure 4.2.1, panel 1). In part, this reflects the steep increase in infrastructure investment during the 2008–10 stimulus response to the Great Recession. But it appears that other forces are increasingly contributing to investment growth, including the ongoing urbanization process, the more recent emphasis on social housing construction, and capacity building in high-end manufacturing and services.
Associated with these changes are important shifts in China’s import basket. As more manufacturing takes place onshore, the share of machinery imports has been gradually declining, whereas mineral and metal imports have grown steadily.
These developments have had a noticeable impact on global trade flows over the past decade as trading partners sent an increasing fraction of their exports to China (Figure 4.2.2, panel 1). The importance of exports to China, when assessed relative to trading partner GDP, shows even sharper increases for several economies. This ratio has, on average, quadrupled during 2001–11.
The trends suggest that China’s rapidly expanding investment may have had a large positive impact on its trading partners’ growth. But with investment already close to 50 percent of output and China’s continued reliance on investment to drive growth, it is unclear whether the new capacity will be profitable. An abrupt and disorderly end to the investment boom, albeit a tail risk, could have adverse effects on China’s trading partners.
To get a sense of the potential magnitude of this dynamic, the spillover from investment activity in China on its trading partners is measured by the product of an economy’s exports to China (as a share of GDP) and China’s fixed investment growth.
This spillover measure varies across countries based on their export exposure to China and over time based on fluctuations in China’s fixed investment growth. By construction, it measures only the influence of Chinese activity on other economies through the direct trade channel; indirect exposure through vertically integrated intermediate economies or through lower commodity prices is not captured.
The effect of the spillover on China’s trading partners’ growth is estimated by regressing emerging market and developing economies’ growth rates on this spillover measure and a number of other controls, including these economies’ lagged growth, terms of trade, and output volatility. The sample covers the period of China’s membership in the World Trade Organization (2002–11) and includes the set of emerging market and developing economies classified under the MSCI AC World Index and key commodity producers. The regression is also estimated using different measures of fixed investment growth in China: overall, manufacturing, and nontradables (calculated by applying shares in fixed asset investment data, available beginning in 2003). This breakdown allows for a comparison of spillovers from a slowdown in manufacturing investment with a deceleration concentrated in nontradables.
In line with China’s widening footprint on global imports, the effect of China’s investment on its trading partners’ growth has increased over time. The most heavily exposed emerging market economies are those within the Asian regional supply chain, such as Korea, Malaysia, and Taiwan Province of China. The results suggest that GDP growth in Taiwan Province of China decreases by slightly over nine-tenths percentage point for every 1 percentage point deceleration in investment growth in China.
Among commodity exporters, the impact is largest on mineral ore exporters with relatively less diversified economic structures and higher concentrations of exports to China. In response to a 1 percentage point slowdown in investment growth in China, the estimated effect on Chile’s growth is a decrease of close to two-fifths of a percentage point. By contrast, larger commodity exporters with more diversified economies, such as Brazil and Indonesia, experience smaller declines in growth.
A decomposition of investment into manufacturing and nontradables shows that spillover effects from China’s manufacturing investment reflect the influence of global demand. Once global demand is included as an additional control in the regression, the spillover from manufacturing fixed investment in China no longer has a statistically significant impact on its trading partners’ growth (whereas global demand does). By contrast, nontradables investment in China has a significant spillover impact on its trading partners’ growth above and beyond the effects of global demand.
The analysis also shows that direct spillover effects from consumption growth on trading partners’ growth have been negligible in recent years. China’s share in global consumer goods imports has increased at a slower pace than its share in global consumption over the past 15 years. China currently plays a small role as an importer of consumer goods, accounting for only 2 percent of global consumer goods imports. The low import intensity of final consumption in China suggests that if a transition to consumption-based growth takes place in response to the structural reforms envisaged in the 12th Five-Year Plan, the direct benefits to consumer goods exporters are likely to be small. Nevertheless, China’s trading partners may still benefit from indirect access to Chinese consumers by selling intermediate goods, parts, and components to Chinese firms that then assemble and customize final products for the local market.