When the US sneezes, an old saying goes, the world catches a cold. That's been nowhere more true than in Asia. But as China's coughing fit grows louder, countries in the region are wondering whether their neighbor's illness will also prove contagious.
Since Wall Street's crash in 2008, Asia has been pivoting to China. The US$16.8 trillion U.S. economy is still 1.8 times bigger and its per capita income dwarfs China's. But China is Asia's biggest trading partner and, increasingly, its benefactor. Flush with US$3.7 trillion of currency reserves and its new US$100 billion Asian Infrastructure Investment Bank, China has used chequebook diplomacy to make friends across the region.
Asia's social media accounts are now pulsating with talk of how a #ChinaMeltdown might send the region into a tailspin. Even Australia, which is reeling from plunging iron ore prices, and Japan, whose currency is suddenly surging, are bracing for a downturn. As China's high-flying economy confronts the basic laws of economics and finance, many countries in Asia are second-guessing the relationships they established with Beijing in better times.
In part, that's because they have trouble discerning Beijing's strategy for dealing with the crisis. Say what you want about Washington gridlock, but the workings of U.S. power is exceedingly transparent relative to that of Chinese policy making. The aggressive Fed rate hikes of the mid-1990s that shook world markets, for example, were amply telegraphed in advance. And Washington's efforts in 2008 to contain the subprime-loan crisis were maddeningly slow, but everybody was able to follow along with the debate. China's response to the #ChinaMeltdown of 2015, by contrast, couldn't be more opaque, unpredictable or - if you're a neighboring government - frustrating.
Until now, Asia hadn't minded hitching its hopes to an authoritarian state run by an impervious cast of policy makers. And, to be fair, the countless steps Beijing has taken over the last two weeks to support stocks paid off yesterday, as the Shanghai Composite Index rose 5.8 percent. But Asia has no way to tell what Beijing plans to do about the current crisis and every reason to doubt China's ability to withstand it.
To be the stable and reliable growth engine Asia needs, China has to recalibrate its entire economy. That will require politically-sensitive reforms to empower small-and-medium-size companies, wean China off its addiction to exports and rein in a vast shadow-banking industry creating fresh debt bubbles.
Xi claims he's on top of these and myriad other challenges. But how would officials from Jakarta to Seoul know? How can neighbors assess whether excessive debt and overcapacity are sending China into a deflationary spiral? The reality is they won't know until it's too late. All they can do is accelerate their own efforts to make domestic demand so they're not so dependent on exporting to China. But that's easier said than done.
And China's problems arrive at an inauspicious time for the region, which has anxiously been awaiting Federal Reserve rate hikes and turbulence in Europe. Bank of Korea Governor Lee Ju Yeol spoke for many yesterday when he warned against underestimating the fallout from Chinese volatility. So did Indonesian Vice President Jusuf Kalla when asked about Greece. "For us the situation in China is more worrying," Kalla told Bloomberg Television.
Investor Bill Gross, meanwhile, says the smart trade now is to "take advantage of other markets that would be affected by China." U.S. growth still matters plenty. But Beijing's GDP arguably matters much more to Asia's health these days. Too bad the region has no real way to take China's temperature.