How is the Netherlands affected by China’s faltering economy?

Current issues related to the economy, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Chief Economist Thijs Knaap on the faltering Chinese economy. “The decline in growth had to happen sometime.”

Economic growth of 4 percent in the fourth quarter of 2021. Many a country would sign up for it. For China, which announced the figure on Monday, it is nothing short of a setback. In fact, it is one of the lowest growth rates since 1990. Now that China’s impressive economic growth seems to have come to a temporary halt, the question looms: how will we be affected? 

An event in the Chinese economy can affect other countries in three ways, Knaap says. Through the trade in goods and services, through financial channels and through the price of raw materials. Trade in goods and services, the trade channel, revolves mainly around Chinese exports, and to a (much) lesser extent imports. From the pen you write with to the phone you make calls with: chances are it comes from China. “It’s a bit of a Dutch instinct to immediately think of trade. But the interesting thing is that in the case of China this instinct is correct,” Knaap says. “Because of these three ways, the trade channel with China does have the greatest impact on the Netherlands.” This was noticeable when the Netherlands needed masks at the beginning of the Covid pandemic and China could not immediately supply them. Knaap does not expect the reduced Chinese growth rate to have an immediate major impact on trade with the Netherlands. At most, the delivery time of, for example, phones will be a bit longer.

Trade
It might be thought that the trade channel is also the most important in the Netherlands’ economic relations with many other countries, but Knaap says that is not the case. “The best example of this is the United States, with which the Netherlands also does a lot of trade. When the financial markets collapsed there in 2008, things went seriously wrong here too, and banks like Fortis and ABN AMRO ran into major problems. Suddenly the financial channel appeared to have the greatest influence. The recession in the Netherlands was not caused by a drop in demand for Dutch products from the United States, but by exposure to the American financial system. This applies to virtually every major economy with which the Netherlands trades, but not to China. This is because for a long time Beijing wanted as few financial ties with foreign countries as possible. As a result, foreign influence is limited and China has little exposure to the international financial system. As a result, a slowdown in Chinese growth is much less serious for an open economy like the Netherlands than if things go wrong on Wall Street.”

Financial ties
Thus, financial ties between China and the rest of the world are relatively small, although foreign money is increasingly entering China. In 2018, for example, only 8.5 percent of China’s stock markets were foreign-owned. By the third quarter of 2021, that had grown to 10.5 percent. “For APG and other investors, the influence of the Chinese market has increased somewhat in recent years, but it is still not a lot,” Knaap said. This is also reflected in the 2021 figures. “That was a really good year, with equity returns of up to 30 percent in the developed markets. If you look at the emerging markets, including China, the returns were very modest, around 5 percent. That is not great for us as investors, but it is not a disaster because China only occupies a modest place in our portfolio. Then you can see on a small scale what is true for the world at large. If the market in China performs a little less well, the entire world economy will not immediately come to a standstill.”

Then there is the price of raw materials. “When China is growing very fast, there is a big demand for oil, iron and cement and you notice that they are getting more expensive. That was very significant at times; in the late 1990s and early this century. At the time, the price of oil was running very high because the world was not used to this sharply increased demand from China. This is currently the case and Beijing’s influence on the price of raw materials is a lot less now.”

Consequences
Knaap doesn’t think it’s surprising that China’s growth rates are declining a bit now. “That had to happen sometime. The country cannot continue to grow at a rate of 10 percent every year for the rest of the century.” Due to the limited exposure to the global financial system, the slight hiccup in the Chinese economy does not have to have an immediate impact on the Dutch economy either. In the event of hiccups in production and transport, there is a chance that China will no longer be able to deliver all products on time, which consumers and businesses here would notice. “More interesting is the question whether economic growth will slow down further,” says Knaap. “A really stagnant economy is difficult to adjust at a certain point. Then it remains to be seen how the Chinese population reacts and what impact that would have on the position of Xi Jinping and the Communist Party. The story is that those in power in China rule by the grace of high economic growth. What will happen in a serious recession is difficult to predict. But we are far from there, with 4 percent economic growth. Moreover, the Chinese are very good at managing this kind of economic risk.”