China’s economic slowdown and why it matters for the PHL

CHINA, the world’s second largest economy, is experiencing economic slowdown. This poses spillover effects to Asia and the Pacific region, including the Philippines. China grew by 3 percent in 2022, short by 2.5 percentage points from its target. Even before the pandemic, China’s growth has already been on a gradual decline—from an average of 10 percent in 1980-2010 to single-digit growth rates in the last decade.

A confluence of factors hampered China’s economic prospects

CHINA’S slowdown partly reflects the trajectory of economies as they mature. However, this shift is hastened by a confluence of domestic and external factors, such as the real estate crisis, trade conflict with the USA, Russia’s invasion of Ukraine, monetary tightening by major economies, and China’s stringent zero Covid policy. It also reflects China’s ongoing demographic transition. China already reported a decline in its population, while India is expected to surpass it in terms of population size later this year. As the workingage population increasingly becomes lean, savings to support a growing base of elderly dependents would also most likely decline.

Why does China’s economic slowdown matter for the Philippines?

CHINA is one of the Philippines’s major trading partners. The Philippines exports $11.5 billion worth of merchandise to China. Including Hong Kong and Macau, this figure goes as high as $21.5 billion, or 29 percent of our total merchandise exports. China is the Philippines’s second largest importer of goods next to USA. Meanwhile, the Philippines imports $28.2 billion worth of goods from China. China supplies 23 percent of Philippine goods imports, making it the largest trading partner of the country in terms of imports. In terms of services trade, the Philippines’s exports to China was at $3.1 billion, significantly larger than the country’s imports of services from China at $1.6 billion.

China’s role in the global value chains

AS the global manufacturing hub, China has been the “poster economy” for GVCS, which involve trade in parts and in tasks. While this international trade paradigm allowed countries to achieve higher growth rates, GVCS also made them vulnerable to economic shocks. Failure in any segment of the assembly line could create ripple effects. The increasingly complicated chains of production imply that disruptions in China will not just affect its direct trading partners, but also the other economies that have direct and indirect trade relations with its networks, including the Philippines.

Chinese tourists in the Philippines

THE Department of Tourism reported that there were 1.74 million Chinese visitors who travelled to the Philippines in 2019. This figure accounts for 21 percent of the total international arrivals in the country. The Covid-19 pandemic hit tourism-related sectors the hardest. Chinese visitors plummeted to 170,000 in 2020, to less than 10,000 in 2021. Consequently, the inbound tourism expenditure nosedived to P27.6 billion in 2021, down from P600 billion in 2019. The tight restrictions in international mobility in China continues to impede the recovery of tourism sector in the country.

Huge remittance inflows from Hong Kong and Macau

WHILE the total OFW remittances from mainland China is dwarfed by the remittances from other parts of the world, the strong economic interconnectedness between China and its special administrative regions also affects the volume of remittances received by the Philippines. Hong Kong alone employs 122,000 Filipinos, or 6.7 percent of the total OFWS in 2021. Cash remittances from Hong Kong amounted to $722.2 million, while remittances from Macau and mainland China amounted to $93.1 million and $24.2 million, respectively. Overall, remittances account for 9 percent of the Philippines’s GDP, which serve as a cushion against the impacts of economic shocks. Remittances also broaden the base of middle-income households and are significant source of financing human capital investments.

Guarded optimism amid China’s clouded economic prospects

UNCERTAINTIES still cloud the economic prospects of China. Given its sheer size and its significant economic links with the Philippines, the economic slowdown in China could create dents in the country’s growth potential.

In December 2022, China already eased up on its zero Covid policy. China’s growth is then expected to pick up, but the long-term structural challenges will linger and will continue to dampen its economic growth. The opening up of China’s economy is a welcome development as it will boost external demand of our goods and services. However, this also exerts upward pressure on the already soaring prices. Looking ahead, the Philippines must therefore retain its guarded optimism, and must prepare for headwinds that could result from our direct and indirect economic ties with China.