MACROECONOMICS

The impact of Chinas Slowdown on the Portuguese Firms

Gil Loureiro
(July 2016)

Historical Facts
Chinas success story was mainly supported by a manufacturing investment and export growth led model.
Low interest rates (cheap funding from public banks) supported a high investment rate, together with low wages
(maintained by excess of supply of rural workforce) and the undervaluation of the Renminbi (RMB), boosted the
price competitiveness of its exports and to gain market share. The result was high GDP growth rates always above
10% between 2005 and 2012, leading China as owner of 17% of the world GDP and 14% of global trade in goods
(from 2% in 1990). A change on those shares definitely have an impact in the global economy and likely in the
Portuguese firms.
Since the 2008 global financial crisis, the Chinese growth model has experienced significant changes. First, the
exports plunged from about 20% YoY on first half 2008 to -20% in the first half 2009. Chinas GDP growth
dropped from more than 10% percent YoY, down to less than 7% percent in the first quarter of 2009. As
response, the Chinese government implemented a huge fiscal stimulus which further raised the investment
ratio to 45% of GDP in 2009 (see exhibit 01). The result was a growth on exports above 30% in the following two
years with a corresponding steady GDP increase.
However, the increase in growth was not to stay for long, weaker external demand from advanced economies
combined with losses in terms of price competitiveness arising from an appreciation of the RMB and higher labor
costs have weighed on Chinese exports. Growth in China has slowed from over 11% between 2005 and 2012 to
below 10% in 2013.
During the Third Plenum which took place in 2013, the Chinese government announced a reform package
attempting to rebalance the economy towards consumption and away from investment. Since then, China has
started to shift from a traditional manufacturing investment-export led model to a new services and consumption
driven economy, at the expense of lower economic growth rate which reached just 6.9% in 2015. In the third
quarter of 2015, consumption reached 58 percent of GDP, with investment slowing to 42 percent.
This shift affects the Portuguese economy as well, data (see exhibit 2) show us that exports from Portugal to
China after a sharps increase between 2011 and 2013 had stagnated then on. Imports from China have remained
almost unchanged between 2011 and 2015. Is also important to mention that China Goods and Services only
accounts for about 1% of Portuguese total exports.
The Position (stock) of Direct investment of China in Portugal (FDI), had a huge increase from 3.8 million in
2011 to 1.2 billion in 2015. First quarter of 2016 gives a promising year with a 37.9% increase compared with
same 2015 period. Tourism activity in Portugal by Chinese visitors sharply increased 66.8% from 12 million to
54 million between 2011 to 2014, but since then on it got more steady with a 14.7% increase.

Linking all together

The analysis of the potential impacts in Portuguese firms by changes in the Chinese economy was organized in
three main effect channels: 1) Direct Trade: the impact in direct imports and exports from Portugal to China; 2)
Commodity prices: the Chinese commodity import second-round effect and indirect impact of commodity prices
on Portuguese firms; 3) Financial Markets: focus in the FDI of China in Portugal.

Direct trade:
Exhibit 3 frame the flow of cause effect in the macro economic variables after the Third Plenum. In presented
facts we observe higher wages and an appreciation of RMB (FX) increases production prices, making Chinese
products more expensive for developed countries, therefore exports grow less (red down arrows in Exports and
GDP mean less growth) which have a direct impact in the GDP that grows less as well. This predicted effect is
inline with the observed growth rate slowdown.
As a response to exports growth rate fall, the Chinese government artificially depreciates the national currency
(from about 6 Yuan Renminbi per USD in 2013 to 6.8 in 2016) making national product cheaper for Portuguese
firms. In Exhibit 2 we can observe the evidence of this effect in imports, Portuguese imports from China for both
goods and services remained almost unchanged from 2011 to 2015, showing small variations of +4.4% in goods
and -1.7% in services. The Portuguese sovereign debt crisis brought an overall decrease in imports of goods and
services in Portugal of more than 20% from 2011 to 2013, what it is likely to be a counter effect which offsets
the potential import increase that didnt append.
A decrease in FX makes external products more expensive for China, this increase of prices for imports
penalizes the goods and services exports directly from Portugal. In Exhibit 2 we can observe the evidence of this
effect in exports, in 2014 and 2015 goods exports have stagnated around 839 million and services sharply
decreased about 30%. Drilling down into product groups, the main exported good from Portugal- Vehicles in
2014 accounted 52.4% of total exports 440.4 million in value, decreased 20% in 2015 and is plumbing more
than 80% in first quarter of 2016. Although the Volkswagen emissions scandal impact in Autoeuropa exports
may explain a good chunk of this decrease, the imports prices rise for China certainly have a significantly share
in the decrease due to its magnitude.
Surprisingly, the second good in the exports ranking is - Minerals and ores which accounted for 22.7% in 2011
and have sharply decreased to 133.1 million in 2014. Had increased 14% in 2015 and back to a significant drop
in 2016 of about 28%. Which is inline as well with the cause-effect analyzed in Exhibit 3. All remaining items
accounted for less than 10% of the export base.

Commodity prices:
It is also likely that lower Chinese growth would heavily weigh on world commodity prices and thus on
commodity exporters countries. In the commodity sector, China in 2015 accounts for 54% of aluminium world
demand, roughly 50% of world nickel and copper demand. Steel and cement, which were growing at a rate of
2530 percent in 2010, have entered negative territory since early 2015. Lower GDP growth together with
capacity excess (due to excess investment post 2008) and China reaction by devaluation FX, increases prices of
imports (see Exhibit 3) thus decrease commodities imports. Although Portugal is not a player in commodities,
it can suffer from the second-round effect of the impact in emerging markets. Brazil and Angola which accounts
together for almost 8% of Portuguese exports, are economies with high dependency of exports to China, 45%
and 20% of total country exports respectively. Thus, a decrease in the exports in those countries, may induce
devaluation of local currency and less disposable income which impacts in the Portuguese firms exports that
will export less to those countries.
The impact on oil prices would be more mitigated given the much lower share of China in oils global
consumption (12%). Furthermore, the rebalance of the Chinese economic model towards consumption, it is
likely to be higher in the future, that will create higher demand of oil for private transportation (in 2015 China
had 32 vehicles per 1000 people compared to 814 in the US). Therefore, the impact observed specially in Angola
it probably not totally explained by the Chinese slowdown rather by the global oil prices fluctuation.

Financial markets:
While compared with the trade channel, the financial integration of China in the international financial markets
is small. Therefore, the impact of a slowdown in the Chinese economy at as first glance must be foreseen small.
However, slowing activity and uncertainties regarding the transition to the new growth model could affect
investors confidence, any shock to China growth outlook might be expected to have significant effects to the
world economy through higher global risk aversion

Portugal, in the period 2010-2014 was the third destination of Chinese FDI outflows and has received 10.6%
share of the European pie. Despite that the 1,216.3 million stock in 2015 only accounts for 1.2% of the total
FDI stock in Portugal, its growing is weighty about 1,216 million in 2015 a 530% grown since 2011. The growth
model shift away from investment makes cheap money scarcer, thus private/public Chinese companies have
less financing resources, thus will invest less in Portuguese firms.
However, uncertainty can open a window of opportunity for FDI outflows to Portugal. Risk averse Chinese
individuals could see Portugal a safer place for investments. This fact together with the Golden Visa program
increased the Chinese FDI stock by 1,530 million between 2012 and 2015. This was crucial to the Real State
sector in Portugal which is suffering from the real state bubble crisis.

In sum
The shift from a traditional manufacturing investment-export led model to a new services and consumption
driven economy, leads Chinese growth to slowdown.

We have seen that Portuguese firms exports are affected negatively in the Direct Trade channel as well as in
the Commodity channel via the second-round effect. Nevertheless, overall impacts are small in the Portuguese
firms because exports via the direct channel only accounts for 1% and the commodity channel for about 8% of
the total Portuguese exports. The benefits Portuguese firms can get from the commodities price drop in the
international markets certainly will offset this negative effect on exports.
The imports however, can have two opposite impacts on Portuguese firms. Those which have production in
China will benefit of prices decrease in direct imports, thus increase profits. Examples of sectors with this profile
are textile and fashion. Nonetheless, Portuguese companies with internal production will suffer the cheaper
Chinese final goods imports which will put pressure on prices, both on the internal and international market.
Thus, the direct impacts seems to be limited and sources of change for the Portuguese firms comes most from
indirect effects.

The FDI in the other hand may face bigger direct effects. The Chinese FDI made by private/public companies
in Portuguese firms will have a significantly slowdown due to the lack of cheap money bringing a negative
impact in Portuguese Firms. But, in the other hand, Chinese outflow FDI in the real state sector leveraged by
the uncertainty and the Golden Visa program, may bring a strong positive impact on firms acting in this sector.
By helping to solve the painful lack of internal demand brought by the real state bubble.
One important consideration, taking into account the highly indebted Portuguese Firms, they will find the
debt burden even less sustainable if price deflation sets in. Price deflation from China and commodity
producers, and a possible rise in interest rates from the BCE, would be a double whammy for these indebted
firms;
Altogether, the direct consequences for business firms in Portugal are small due to its small exposure to China,
but the indirect consequences may bring a positive outcome to the Portuguese firms.

Exhibit 1 Growth of Chinas GPD, Investment and Exports

Evolution of China's GDP, Investment and Exports

50%

30,00%

45%

25,00%

40%

20,00%

35%

15,00%

30%
10,00%
25%
5,00%
20%
0,00%

15%
10%

-5,00%

5%

-10,00%

0%
2004

2006

2008

Investment (% GDP)

2010
GDP Growth Rate

2012

2014
% change in exports

-15,00%
2016

Exhibit 2 Historical volume of exports from Portugal to China

Portugal trade balance with China

Exports

Imports

2016

Var%

15/11the

jan/Apr

jan/Apr

16/15(b)

839.0

27.1

291.3

171.4

-41.2

162.4

108.6

80.6

--

--

--

1,370.4

1,599.1

1,777.6

4.4

579.7

582.8

0.5

246.5

243.2

239.8

261.5

-1.7

--

--

--

-799.1

-710.7

-836.7

-1,091.6

--

--

--

--

2013

2014

2015

396.6

778.0

657.5

839.7

32.8

60.7

245.4

1,526.0

1,391.3

284.0

Services

Services

Balance

2015

2012

Goods

Goods

Var%

2011

1,380.7

(a) arithmetic Average of annual growth rates in the period 2011-2015

(b) annual variation rate 2015-2016
(2011 to 2014: final results; 2015 and 2016: preliminary results)
Drill Down of Portugal exports to China by product
groups
Var%

2011 % Tot 11

2014 % Tot 14

2015 % Tot 15

64.3

16.2

440.4

52.4

351.8

41.9

-20.1

89.9

22.7

133.1

15.8

152.1

18.1

14.3

58.8

14.8

47.1

5.6

74.5

8.9

58.2

44.7

11.3

50.2

6.0

59.0

7.0

17.4

9.9

2.5

13.1

1.6

34.3

4.1

161.2

Plastics and rubber

20.0

5.0

24.6

2.9

32.6

3.9

32.6

Wood and Cork

28.7

7.2

24.2

2.9

24.7

2.9

1.8

Textile materials

18.4

4.6

28.2

3.4

23.8

2.8

-15.6

Base metal

24.9

6.3

25.9

3.1

21.5

2.6

-17.1

9.4

2.4

7.5

0.9

12.4

1.5

64.5

Footwear

0.3

0.1

6.3

0.7

11.9

1.4

89.9

Clothing

4.8

1.2

6.0

0.7

9.8

1.2

63.4

Agriculture

3.3

0.8

5.3

0.6

7.1

0.9

35.5

Chemicals

6.7

1.7

12.3

1.5

3.8

0.5

-68.8

Vehicles and other mat.

transport
Minerals and ores
Electrical machinery and
apparatus
Cellulose and paper folders
Groceries

Optical and precision

instruments

15/14

Hides and skins

3.6

0.9

4.9

0.6

3.6

0.4

-27.2

Mineral fuels

1.0

0.2

0.0

0.0

3.0

0.4

Other products (a)

8.1

2.1

10.6

1.3

13.1

1.6

23.9

396.6

100.0

839.7

100.0

839.0

100.0

-0.1

Total

Source: INE-National Statistics Institute; Unit: 1,000,000 euros

Note: (a) tobacco, hats, umbrellas, precious stones and metals, weapons, furniture, toys, artwork, various works.
-Coefficient of variation > = 1000% or zero value in 2014

Exhibit 3 Direct Trade and Commodity cause effect diagram

CHINA
FX

Wages
FX
Prices
Exports

Prices
Imports

Prices

GDP
Goods&Serv.
Imports

Exports
BRASIL

Exports
PORTUGAL

Exports

Global
Market

Direct Trade channel

Commodity channel

Direct Trade channel

Ext. Demand

Goods&Serv.
Exports

Commodity
Imports

Exports
ANGOLA

Imports