If China Slows: Prepare for Disruption in EMEA Business

The dragon’s breath is losing steam – increasing wages, mounting social tensions and unprecedented political transformation are all putting strains on the Chinese economy. GDP growth figures for 2014 have fallen from 7.5% to 7.3%, with downside scenario forecasts for 2015 slipping even closer to 6.5% on an annualized basis. The risk of a sharp, sustained Chinese economic slowdown is thus already high on the agendas of Asia Pacific executives, but Frontier Strategy Group’s latest analysis shows that a China slowdown scenario poses systemic risks globally.

IfChinaSlows_Infographic_FSG

In Europe, the Middle East, and Africa (EMEA) in particular, there are three ways in which a China slowdown will substantially impact regional economic growth:

  • A fading export market: China’s boom has provided a growing, reliable export destination for many European companies, but a slowdown will suppress top-line growth for industrial, technology, and consumer firms alike. The commodity-led economies of the Middle East and Africa could be harder hit. Chinese demand has filled the void left by Europe’s stagnant consumption. Reduced commodity exports would cut governments’ ability to spend, weakening an important growth driver for many of the world’s most dynamic frontier markets.
  • A pullback in foreign direct investment: One-quarter of all FDI into Sub-Saharan Africa since 2006 has come from China. However, recipients of Chinese FDI are less likely to be severely affected, because Chinese companies are more likely to focus on growth internationally if their domestic market weakens.
  • A trigger of financial-market instability: Depending on whether a Chinese slowdown surprises global financial markets, financial volatility would result in a flow of capital back to developed markets, causing significant currency volatility in EMEA and impacting the prices of goods imported from developed markets, hurting consumers across the region.

Taking these impacts into account, we have constructed an index that allows multinationals corporations to gauge how a China slowdown’s impact to EMEA economic performance could in turn impact their corporate portfolio.

In this analysis, countries are ranked based on their relative susceptibility to slowing demand from China as well as the extent to which they could be affected by the repercussions of a Chinese slowdown on the global economy. The results are striking.

  • #1: South Africa’s mining sector, already struggling with strikes and falling demand from the eurozone, will be severely hurt by a slowdown in Chinese demand for its exports
  • #5: Switzerland has a free trade agreement with China that has increased exchange between the two countries. The resulting increased economic relationship helps to diversify Switzerland away from the eurozone’s low growth, but leaves it more susceptible to a softening of Chinese demand
  • #6: 80% of Qatar’s exports are to Asia, much of them liquefied natural gas destined for China. Long-term demand for Qatar’s energy is at risk, with China already diversifying its energy sources by signing a long-term gas supply deal with Russia. However, a Chinese slowdown could accelerate this waning demand for its exports, decreasing government revenue and investment

Some economies would experience mixed results, with big winners as well as losers. For example, Turkey (#40 on our list) has been successful in diversifying its export partnerships away from China. It would still experience a slowdown in demand as a result of a Chinese economic slowdown, but the impacts would be less severe. In fact, producers in Turkey could benefit from less Chinese ability to invest in higher value-added production that might otherwise have presented more rigorous competition

The most successful firms are run by executives who constantly plan for destabilizing scenarios like a China economic slowdown, and develop mitigation plans to protect their businesses when such events unfold. In the China slowdown scenario outlined above (see infographic), executives can proactively identify and benchmark disruptions against their country revenue figures, allowing them in turn to stress-test their market prioritization assumptions and identify key markets for which adjustments in strategic planning may be required. Leaders responsible for global strategy should also reassess their investment priorities to identify countries that have strong growth fundamentals and are most resilient to external shocks.

EMEA’s corporate leaders will be increasingly challenged to craft business plans that protect their performance in a highly interlinked global economy that is susceptible to cross-regional contagion. If China slows abruptly, unprepared corporate executives will lose their footing, even outside the Middle Kingdom. Multinationals should plan for that contingency today.

Follow me on Twitter @FrontierStrtGrp


If you wish to learn more about how a China slowdown will impact your business you can access our full analysis here.  Not a client? Contact us for more information.

One thought on “If China Slows: Prepare for Disruption in EMEA Business

  1. Pingback: Friday Links | What Happens if China Slows Down | EM (H)EDGE - tapping local knowledge in emerging markets

Leave a Reply

Your email address will not be published. Required fields are marked *