Exports to China: Switzerland is dependent on China's growth

Swiss exports react to China's economy

Exports to China are dependent on China's economic growth. Should Chinese growth slow, Switzerland would see, above all, indirect consequences. And, the industries – besides the watch industry – that are particularly sensitive to changes in China's economic situation.

China's weakening economy is affecting Swiss exports as well

China, the world's second largest national economy, is losing momentum. The International Monetary Fund expects that the country will experience a decline in its growth rate from 10% to 6% in the next few years. One reason for the economic setback could be the trade conflict China is having with the US. However, demographic change and high debt are also negatively impacting China's economy.

This development also indirectly affects the Swiss economy. Last year, 5% of Swiss exports went to China. That's not much when compared to Germany, where the export volume to China was four times greater. Still, some Swiss industries are heavily dependent on China's economy.

Effects on exports to China

Export elasticity can be used to demonstrate the effects of a sharp decline in China's growth on Swiss exports. Under the assumption of a constant exchange rate, export elasticity shows by how many percentage points the export growth in Switzerland would increase or decrease if the growth of China's gross domestic product (GDP) changes by one percentage point.

The overall elasticity of exports to China is very low

The elasticity of all exports to China is very low

Color = GDP/export elasticity (2000-2018)
Thickness = Total export sales 2018

Source: Datastream, Swiss Federal Customs Administration, Credit Suisse

The elasticity between Switzerland and China is not statistically significant. However, when you look at individual industries, you see that, at 2.6 percentage points, the food industry in particular is very dependent on China's economic situation. The watch and machinery industries are also especially sensitive to changes in the Chinese economy.

Exports depend on the industry

Exports depend on the industry

GDP/export elasticity between Switzerland and China by industry (1999-2018).

Source: Datastream, Swiss Federal Customs Administration, Credit Suisse

China's new economic model increases the sensitivity of exports

The sensitivity of the global economy to changes in the Chinese internal market will once again increase thanks to Beijing's new government program. That's because China is changing from an export-driven economy to a consumer-oriented one. This promises increased imports, but at the same time, the increased inflow of goods means that China's trading partners will become more dependent on the country's economic situation. For example, the Swiss pharmaceutical industry, which is currently not very sensitive to economic conditions, will, in the future, be affected by the growth slowdown in China.

The composition of Swiss exports also provides information as to the extent of Switzerland's reliance. Switzerland exports mainly finished products, so the Swiss economy is particularly dependent on Chinese final demand. Should China's GDP growth decline, a drop in demand could follow.

Exports to China consist mainly of finished goods

Exports to China consist mainly of finished goods

Value creation of Swiss industrial exports in 2014 according to use.

Source: World Input-Output Database, Credit Suisse

Exports to China are also influenced by external factors

However, China's significance cannot be derived simply from direct trading statistics. One example of this is the watch industry: While China imports relatively few watches, Chinese people often buy Swiss watches while abroad. Therefore, sales in the watch industry depend primarily on Chinese travel patterns and less on Chinese demand.

Swiss exports to Germany are also influenced by China's economic development, as 20% of exports to Germany are processed there and then exported to China, among other countries. One prominent example of this is the automotive industry.

Two possible scenarios for Swiss exports to China

We can forecast just how far-reaching the consequences of an economic downturn would be using two different scenarios. On the one hand, China's growth could slow due to internal factors. These would include the high levels of debt and demographic change. If this were the case, the impact would only be felt in specific industries, namely those that either conduct direct trade with China or that react strongly to changes in purchasing power.

On the other hand, external events could trigger a decline in growth. An escalating trade conflict would have serious consequences for the Swiss economy, because even industries that are not directly related to China would be hit with falling demand due to setbacks in the global financial markets.