Speaking of Asia

Asia beyond the China slowdown

The crisis over Chinese stocks may have abated for now, but China's slowing growth will impact the continent

Soldiers goose-stepping in full ceremonial attire is an impressive sight, anywhere. Yesterday, as the People's Liberation Army paraded in Beijing's Tiananmen Square to mark victory over Japan in World War II, it was a moot question whether the goosebumps the world was getting were equally for another reason: The shocks from China reverberating through the world economy.

Canada, despite its close economic ties to a resurgent United States, has slipped into a technical recession. Singapore is staring at the same prospect and so is Australia, which had acquired the reputation of a Teflon economy.

Rock-solid Germany, whose first-class engineering goods were lapped up by China, is seeing easing demand. South Korea, which now arguably leads the world in technological innovation, is shaking - this week, it reported a serious shrinkage in exports on the back of a significant drop in shipments to China. Speculators are hammering at the currencies of Indonesia and Malaysia, both large commodities exporters to China.

Ms Christine Lagarde, head of the International Monetary Fund, flew to Jakarta on Tuesday to sound a warning on global economic health. "Even here in Asia, the pace is turning out slower than expected - with the risk that it may slow even further, given the recent spike in global risk aversion and financial market volatility," she said, adding that Indonesia, Asean's largest economy, was at risk of being on the wrong side of several important shifts, starting with China.


The headlines say it all. Mouse of Wall Street, goes the New Yorker, with a cartoon of a skittish rodent leaping across a sea of red ink at the sight of a supine feline looking up from the bottom of the stock charts. The Economist is more direct: The Great Fall of China.

Beyond the headline news of easing growth in the No. 2 economy, the confused signals emanating from its policy managers, and the nervousness the world feels at the obvious implications of sand in the principal turbine of global growth - China contributes as much as 15 per cent of that - is a growing feeling that the mainland has surrendered a bit of its swagger.

If President Xi Jinping persists with his demand for a new model of Big Power relations when he meets Mr Barack Obama in Washington this month, it will no longer be with the same self-assurance as he displayed two years ago at Sunnylands.


The fault for a lot of this is not with China. Its economic masters, having built up a significant part of the nation's infrastructure and manufacturing sinews with huge amounts of credit are correctly turning to a consumption-led rather than investment-led growth model, as is appropriate for its current development stage.

Services have overtaken manufacturing in terms of economic contribution as the economy undergoes a supervised rebalancing. At some point the gravy train had to run out for countries pushing oil, steel and timber into China. It has, now.

Where China seems to have erred is in thinking that the normal rules of economics and business cycles did not quite apply to it. Perhaps, like most governments, it also is prey to the human frailty of not "fezzing up" to the truth of bad health. Thus, it maintained unrealistic growth targets for which it fed one bubble after another with large amounts of debt, as Mr Ruchir Sharma, the Morgan Stanley economist and author of the best-selling book Breakout Nations, pointed out recently.

Beijing first fed a property bubble. When that burst, it fed the next bubble - in stocks. At the height of the mania, the Wall Street Journal reported early last month, some people were picking stocks on their hair-dressers' advice. Meanwhile, billions of dollars were being taken out of the mainland by Chinese investors, adding to downward pressure on the economy. All this set the stage for the surprise devaluation on Aug 11 which spooked global markets, and has continued to have an impact since.


For Asia, the sense of deja vu is palpable. A 50 per cent devaluation of the Chinese yuan in 1994 set the stage for the Asian financial crisis three years later as speculators attacked currencies, some pegged to the US dollar, of nations whose economies had become less competitive. Then, as now, the US Federal Reserve was about to raise short-term interest rates, giving investors an incentive to move their money from Asia into the safety of US markets.

It needs no saying that last month's Chinese devaluation was negligible compared with the levels of 1994. But, because of the poor way Beijing communicated the news without preparing the ground, the move was seen as one prompted by weakness and worry. This is why markets reacted the way they did even though the fundamentals of all the economies roiled in 1997-98 - Thailand, Indonesia, Malaysia and South Korea - are in better health now than at the time.

Where does all this leave Asia?

The crisis may have passed, or paused, but the broader slowdown story is by no means over.

During the Asian crisis, China helped out by not devaluing further. It may not be able to do the same this time; options trading on the Chinese yuan suggest that investors believe the drops in yuan may resume after Mr Xi returns from the US. China's financial larder is well stocked but there are limits; already it seems to have spent more shoring up stocks and the currency than the money it had set aside for the Asian Infrastructure Investment Bank and One Road One Belt projects.


Clearly, further China-related nervousness awaits and some are no longer polite about this. At a recent seminar hosted by the Council of Foreign Relations in New York, Professor Zhiwu Chen of Yale University said that, given its huge debt levels, China will be doing well if it can contain its crisis to mere stagnation for the next 10 years.

"If the Chinese government is able to manage a Lost Decade with very low growth - or no growth - without an economic crisis, it will be a policy achievement," he said.

Even though Asian economies are in better condition and their balance sheets safer than 18 years ago, some impact on growth is inevitable because China is buying less and that's the way it is going to be for a few years. What is more, there is no viable alternative.

Japan's economy, just behind China in size, simply does not have the energy or appetite. Neither does India, Asia's No. 3. An India expanding at its claimed 7 per cent adds only about US$150 billion (S$212 billion) to the global growth pot, half what a China expanding at 3 per cent could offer.

Another worry is that political unrest is gathering in the biggest economies, all of which have leaders who started with so much promise. The effects of China's stock-market meltdown and investor flight on the nation's politics aren't clear yet, but other big economies are seeing rising unrest. The Japanese are unhappy about Prime Minister Shinzo Abe's moves to re-interpret the peace Constitution, Indians are up in arms over attempts to reform land and labour laws. Indonesian workers are in the streets for higher wages and complaining about joblessness. South Korea is perhaps an exception in this regard, at least for the moment.

Also, economic integration isn't proceeding fast enough. Indonesia, Asean's biggest nation, is even beginning to look worryingly protectionist, even isolationist under President Joko Widodo. Ms Lagarde sounded a warning on that this week, saying a successful trade-development strategy hinges on "resisting the pressure to look inward and removing barriers to competition - especially when the going gets tough".

Beyond lie further challenges as lower fuel costs, the reshoring phenomenon, and the march of technology and automation make mass manufacturing in the US and Europe as inexpensive as, say, in Indonesia. Rather than meeting this challenge head-on with a determined effort to improve productivity and costs, Indonesia, for instance, has been yielding to demands for higher minimum wages without matching gains in efficiency. Likewise, Malaysia remains mired in a middle-income trap. Its wage competitiveness is sliding compared with many of its Asean peers. Foreign direct investment has halved this year. The stink of scandals has worsened the atmosphere.

If ever there was a time for Asian nations, from Japan to India, with Asean in between, to stay on the path of economic reform, improve efficiency and rapidly build infrastructure, it is now. With the exception of Japan, and, recently, China, where the age dependency ratio has tilted adversely, most have young populations which can be moulded to face the onrushing challenges. But that window of opportunity will eventually close as well. There's only so much time.

A version of this article appeared in the print edition of The Straits Times on September 04, 2015, with the headline 'Asia beyond the China slowdown'. Print Edition | Subscribe