Is China Casting a Shadow Over Asia?
The Chinese economic model is shifting.
According to estimates from Coface, the trade credit insurance company, growth is unlikely to exceed 6.7 percent in 2015 and 6.2 percent in 2016, compared with 13.4 percent in 2006 and 2007.
This slowdown in growth being experienced by China, according to a Coface report, “is mainly a result of the technological and capital catch-up process running out of steam. Several industries are suffering from overcapacity and high corporate indebtedness is impacting investment.”
China is trying to find a way to achieve healthier, more sustainable growth, according to the report but this will not be without pain for the country and its neighbors.
A number of elements contribute to the ongoing change to the Chinese model. Deteriorating price competitiveness in relation to other countries in Asia has been brought on primarily by higher labor costs. There has also been a transition to growth sustained by consumption rather than by investment.
Higher labor costs has meant that China is losing out in foreign direct investment in favor of more competitive countries such as Thailand, Malaysia, Indonesia, and Vietnam.
The contribution of investment to growth has become less significant, as evidenced by the gradual slowdown in the growth of fixed capital investment, in the profits reported by companies, and in industrial production.
Chinese authorities, who want to rebalance growth, support the greater role of consumption in economic growth.
“In the long term, the Chinese economy’s financial liberalization is likely to offset the slowdown linked to the loss of price competitiveness, by supporting consumption and moving the country up the value chain,” said the report. “However, in the short term, the slowdown poses risks both for the domestic economy and for other countries in the region.”
Hong Kong and Singapore are both very exposed to the slowdown in China. Their financial markets are highly correlated with the Chinese market and as a result of cross-border bank loans their banks are exposed to the decline in the creditworthiness of Chinese companies. These countries are also exposed through trade, because the proportion of their exports to China in high-risk sectors is significant: 74 percent of GDP in Hong Kong and 15 percent in Singapore, according to the report.
Mongolia also exports large volumes to China and is likely to suffer from a slowdown. “Impacted by lower commodity prices, as well as lower Chinese investments in related sectors, Mongolia will see a fall in the volume of demand for minerals, metals, and fuels,” said the report.
Thailand, Malaysia, Indonesia and Vietnam face moderate risks from the China economic slowdown. Their high-risk exports represent less than 10 percent of total GDP. A 10 percent fall in exports to China would lead to a loss of growth of less than one point in these countries.
Importantly, these countries benefit from China’s declining competitiveness and are seeing an increase in foreign direct investment, noted the report.
India and the Philippines are relatively immune from China’s maladies, according to Coface. Trade relations with China are limited and they benefit from the fall in commodity prices.