Economic Affairs

No meltdown for China, but a slowdown

Asia-Pacific economies, including Singapore, will be hit

Many investors are wondering just how weak China's growth will turn out to be as the mainland economy bottoms out - and, in turn, how adversely Singapore will be affected by this slowdown.

Three weeks on from a massive stock market rout - and a surprise yuan devaluation a month ago - that rekindled fears of the global financial crisis and, for those with longer memories, the 1997-98 Asian financial crisis, nerves have calmed somewhat.

And since the world hasn't ended, in market terms, some experts have taken the opportunity to undertake a more measured analysis of the state of the Chinese economy.


ST ILLUSTRATION: MANNY FRANCISCO

Economists are saying that the mainland is indeed slowing markedly, with some red flags, but they add that these weaknesses do not necessarily spell disaster.

In a recent report, Standard & Poor's (S&P) Asia-Pacific chief economist Paul Gruenwald said: "We are less uneasy about the state of the Chinese economy.

"The second-quarter gross domestic product (GDP) growth numbers were in line with the official annual growth target of 7 per cent.

"This did not square with the doomsday view of the market following the steep stock market correction."

Analysts are arguing that, to a large extent, the stock market rout was a correction as the market had already run up very substantially and that the market is now at a point where valuations are more closely based on fundamentals.

The unexpected devaluation of the yuan, while shocking to some at the time, is also now being seen in a broader perspective.

After all, the yuan was devalued 2 per cent in a one-off weakening on Aug 11. Since Aug 10, it has fallen some 3-4 per cent. DBS Bank's head of economics and currency research David Carbon says in a recent note: "A 50 per cent crash in equity markets since June doesn't reflect a crumbling economy any more than the 100 per cent rise earlier this year reflected a booming one."

MIXED PICTURE

It could be worse.

While the latest August economic data for China was negative and lacked any immediate signs of a turnaround, not all indicators fell steeply.

Data released included a falling purchasing managers' index, a further signal of declining manufacturing activity.

Commodity prices continue to be weak - iron ore has dropped some 70 per cent, which shows that China's demand for the commodity has eased considerably.

Bank of Singapore economist Richard Jerram also highlights the far weaker growth in industrial production.

Where it used to grow at 14 per cent per year up to 2012, growth on average has now fallen to 6.8 per cent and figures so far this year show a further slowdown to just 6.3 per cent.

There are positives, however. For example, retail sales, a measure of consumption, is growing at a healthy 12-13 per cent a year as China's burgeoning middle classes continue to spend heartily.

Although there may be some signs of an uptick in the property market, overall it continues to be weak.

High debt levels have been a concern and remain so.

To a certain extent, investors have accepted that China's growth rate is never going to hit the 8 per cent level which was a magic figure for many years.

There is also growing acceptance that the transition from a manufacturing- and infrastructure-led economy to one based on consumption and services may take longer than envisaged, probably with some painful adjustments along the way.

However, what shook fund managers out of their complacency over China was the recent stock market plunge as well as Beijing unveiling a series of measures over the past few months, ranging from the series of yuan devaluations, the cutting of interest rates and a slew of other moves - many broadly aimed at giving the economy a boost.

The moves, coming in fast succession, raise concerns over the policymakers' ability to manage market turbulence as well as the impact on the domestic economy and the rest of the world.

IMPACT ON ASIA-PACIFIC GROWTH

Still, the fact that China is no longer the Great Wall of economic growth it used to be does have serious consequences for Singapore, especially in a globalised economy where no one can remain immune from economic shocks. With the United States and Europe also facing their economic wobbles, where are the drivers of growth to come from?

According to Swiss private bank Julius Baer, trade between China and Singapore has yet to be significantly affected.

However, Singapore can be hit indirectly. "Low commodities prices have impacted our neighbours Malaysia, Indonesia and Thailand, and one of the reasons they are low is because demand growth from China for oil and rubber has slowed," said its head of research (Asia) Mark Matthews.

Ratings agencies Moody's Investors Service and S&P already downgraded forecasts for the Asia-Pacific economies last week.

S&P talked of the increased risks of China's slowdown affecting growth.

Even if the US grows, the key economies of Asia may not be the ones that immediately benefit from a US recovery.

"The tiger economies of Asia (Hong Kong, Singapore, South Korea, and Taiwan) have taken a major hit from slow export growth...The downside risks to our baseline forecast for Asia-Pacific have increased," Mr Gruenwald said.

"These risks remain centred mainly around developments in China and their impact on the rest of the region and beyond."

In Singapore, the manufacturing sector, which forms about 20 per cent of the economy, is facing tough times, going by recent manufacturing and export numbers, due to poor external demand, says DBS Bank's senior economist Irvin Seah.

Even the services sector, which forms two-thirds of the economy, has seen growth moderate to about 3.5 per cent in the second quarter this year, compared with a year earlier. Since it is labour intensive, the domestic manpower crunch owing to ongoing efforts to restructure the economy here has weighed down growth, Mr Seah added.

The uncertainty that comes from the timing of the US Federal Reserve's looming rate hike - even though most analysts agree that rates will inch up just a shade higher, by 25 basis points in the first instance - has also weighed on investor sentiment.

(The Fed's policymaking arm is meeting this week with a decision on rates due early Friday Singapore time.)

Not helping matters is the haze, which has cast a pall, literally and metaphorically, over Singapore and the region.

While all this does not add up to a crisis many were fearing just a month ago, it does not augur well for growth.

Growth at home - as in most parts of this uncertain world - is likely to to be anaemic and unexciting for this year at least.

A version of this article appeared in the print edition of The Straits Times on September 16, 2015, with the headline 'No meltdown for China, but a slowdown'. Print Edition | Subscribe