China's economic slowdown will impact global and GCC economies by disrupting global supply chains, which are deeply interconnected with China, said Marmore Mena Intelligence, a subsidiary of Kuwait Financial Centre (Markaz). 

 

To gauge the direct impact on GCC countries, it is important to analyse their trade linkages with China. For the GCC countries, the slowdown in China implies a reduction in oil exports to China. 

 

China, the second-largest economy in the world, is the second largest consumer of oil with a share of 15% of the global consumption. Among GCC countries, Oman has the highest share with its exports to China accounting for almost 42% of its entire exports. 

 

Shortage of supply

Exports from Saudi Arabia, Kuwait and Qatar have sizeable exposure to China at 19%, 27.4% and 12.7% respectively.  GCC countries import several finished consumer goods from China, mainly electronics. Deflation in China might reduce the cost of imports, but a continued economic slowdown would lead to a shortage of supply.

 

After China’s economy reopened in the first half of 2023, China’s real GDP growth in Q1 2023 was 4.5%, which was above market expectations of 4%, supported by pent-up retail consumption. However, the quarter-on-quarter growth reduced to 0.8% in Q2 2023 from 2.2% in Q1 2023, indicating a slowdown in domestic economic activity.

 

The fall in real GDP can be attributed to the fall in domestic consumption expenditure and export components of the GDP. The Chinese economy is an export powerhouse, which accounts for almost 20% of the GDP. In 2023, after the reopening of the Chinese economy, export demand slowed down. This is attributed to the global slowdown led by high inflation.

 

Weak demand

At a time when the rest of the world is facing high inflation, China is facing an economic slowdown due to weak demand. Challenges in the real estate sector further affected the economy. Piling up of unsold buildings in the real estate sector has driven the debt burden of top real estate companies such as Evergrande and Country Graden. These companies have filed for default which could ultimately lead to pressure in the banking sector.

 

The Chinese government has taken steps to combat the economic slowdown. The revival of demand in the housing sector is key for reviving the Chinese economy. 

 

Therefore, to promote housing demand, the Central Bank and financial regulators decided to reduce home purchase restrictions. Further, the government has decided to tackle the fall in the value of the currency by reducing the amount of foreign currency banks are mandated to hold as reserves to 4% from 6% of their foreign exchange deposits. 

 

These stimulus measures undertaken by the government are expected to revive demand in China, which could help in the recovery of oil demand. The increase in demand for oil would lead to the relaxation of supply cuts from Opec+, which would in turn support the economic growth of GCC countries.-- TradeArabia News Service