John Whelan: Irish exporters can expect further challenges over trade with China
The latest blow to the Chinese economy came last week when global ratings firm Fitch affirmed the country’s high level debt rating, but signalled that the outlook was less rosy amid concerns about Beijing’s economic and trade model.
Fitch pared its China outlook to negative, a move that indicates that the firm could be minded to reduce the debt rating in the future as the country contends with more uncertain economic prospects and struggles to manage a property market into a more sustainable growth model.
It comes after China’s public debt has soared in recent years, as the government has tried to push up growth rates by pumping money into the economy.
This is not the first warning sign: In December, ratings firm Moody’s had also downgraded its outlook on China’s debt.
As the economic woes deepen in the giant Asian economy, trade between Ireland and China has deteriorated sharply.
Exports of manufactured goods to China fell by a third and the imports of a wide range of critical materials to support Irish manufacturing fell by a quarter. Such losses will be hard to replace in the current global market turmoil.
The Chinese government has unveiled fiscal and monetary policy measures in a bid to address the looming property and banking challenges, belatedly moving to prevent widespread fallout from a rapid slowdown in the property market for businesses and consumers. As with large ships, shifting direction in economic policy is always more difficult in a large economy.
According to an IMF report in February, debt in China across all sectors — government, businesses, and households — has continued to rise.
The report highlights the rapid increase in loans for micro and small businesses, which raises concerns about the quality of the loans in the banking system in the future.
Irish exporters and importers can expect further damage to trade over the coming year. China’s malaise will likely test the profitability of Irish traders, including the risk of not getting paid by Chinese customers. The rising cost of insurance protection and the rising insolvency numbers of Chinese suppliers is putting supply lines to Irish industry at risk.
Financing Ireland’s exports is expected to rise, as the cost of credit insurance and bank letters of credit that are used extensively to trade across Asia rise.
The bright spot in the Ireland-China trade is the continued steady demand for services out of Ireland, which grew 15% to €11.4bn last year, according to the estimates from the UN Conference on Trade and Development (UNCTAD).
Communications technology including social media, delivered by US global players based in Ireland such as Apple, Amazon, and Microsoft, dominate Ireland’s services exports, but aircraft leasing is also a major services export.
China is the world’s single largest market for airline leasing, according to aviation consultancy Cirium. Almost 80% of China’s global portfolio is leased to operators from outside the country, a market that will remain a key market for Irish leasing companies such as AerCap, the global aircraft giant.
Some international air leasing firms have begun to reduce their exposure to China, according to some industry executives and analysts.
Friction between the US and China, coupled with uncertainty over war risks surrounding Taiwan, are adding to wider concerns over geopolitical risk.
The major risk is whether there could be war in the coming few years cross the Taiwan Strait, which could put many aircraft assets at risk.
In the case of the Russian invasion of Ukraine, a large number of leased aircraft were commandeered by Russia, and there is reason to believe that could also happen, if the same sanctions were imposed on China.
For the time being though, against the backdrop of large financial imbalances and slowing growth outlook, the Year of the Dragon is spreading a worrying fire in the belly of Irish exporters and importers.
- John Whelan is a leading expert on Irish trade