Malaysia’s economic fortunes hinge on China’s success … or failure

 

China is Malaysia’s largest trading partner, accounting for 17% of the country’s total trade. (Freepik pic)

PETALING JAYA: China will figure strongly in Malaysia’s economic fortunes going into 2024 and experts agree that the impact, one way or the other, will be significant.

However, views differ on whether China will see economic growth and therefore have a positive impact on Malaysia, or a decline, which will be a dampener.

Universiti Malaya economics lecturer Goh Lim Thye said China is expected to see growth in 2024, and that will lead to a resurgence in its demand for Malaysian products.

On the other hand, research house KRA Group strategy director Amir Fareed Rahim believes uncertainties remain in the Chinese economy and that could present a challenge for Malaysia, especially on the export front.

Being an export-oriented economy, Malaysia is vulnerable to downturns faced by its trading partners. At the same time, it also benefits if their economies do well.

China accounted for 17% of Malaysia’s total trade in 2022, making it the country’s biggest trading partner.

Goh cited the 4.9% GDP growth in China in the July-September quarter as well as the International Monetary Fund’s (IMF) upward revision of its growth forecast to 5.4% as signs that there will be an upswing in demand for Malaysian goods.

The volume of trade between Malaysia and China grew 15.6%, from RM411.14 billion in 2021 to RM487.13 billion in 2022, giving it a 17.1% share of Malaysia’s total trade and confirming its position as Malaysia’s largest trading partner for the 14th consecutive year.

Exports to China grew 9.4% to RM210.62 billion in 2022 compared with the previous year, surpassing the RM200 billion mark for the first time.

However, the value of trade between the two countries declined 8% to RM369.09 billion in the period from January to October 2023 from the previous corresponding period.

Goh attributed the decline to a 9.5% drop in exports to RM157.35 billion, driven by reduced shipment of E&E products, palm oil, palm oil-based agricultural products and iron and steel products.

Amir pointed to the IMF’s lowered projection of 2.9% for global economic growth to emphasise his point that it will be a challenging year for Malaysia.

“There are uncertainties over China’s economy and renewed geopolitical conflict, weakening the global economic outlook,” he told FMT Business.

Amir said China’s economic decline will also have an impact on tourist arrivals.

However, he agreed that the current 30-day visa-free travel allowed for Chinese and Indian visitors to Malaysia could lead to a positive spillover into tourism-related industries, especially retail.

Goh said new taxes such as the capital gains tax and luxury goods tax as well as the increase in the sales and service tax (SST) would raise government revenue by only 1.5% to RM307 billion.

“This enhanced fiscal space should be strategically utilised for infrastructure development, healthcare, and education to stimulate further growth,” Goh added.

Malaysia University of Science and Technology economics professor Geoffrey Williams said barring any major global events, the growth trajectory for 2024 should be stable. He expects inflation to hover around 2% or lower and growth of around 4%.

“This enables the government to shift to structural reforms, particularly subsidy rationalisation. However, other reforms to raise incomes and to deal with the pension crisis are also essential, he told FMT Business.

But in the view of Pacific Research Centre of Malaysia principal adviser Oh Ei Sun, the world economy remains depressed and it will have a negative impact on Malaysia.

“Attracting new foreign direct investment (FDI) and retention of local capital will be key to maintaining basic economic performance,” he said, adding that next year will likely be another tough year for the Malaysian economy.

“There are external factors such as the slow global economy that Malaysia cannot control. However, it should take full advantage of its low exchange rate to promote export, and improve ease of doing business to attract more FDI,” he said.

Bank Negara Malaysia has projected a GDP growth of 4% to 5% for 2024.

Its outlook is underpinned by the significant growth in momentum in 2023 when the country’s real GDP grew 3.3% in Q3 2023, up from 2.9% in Q2 2023. - FMT