Speaking Of Asia

Risks of putting all eggs in China basket

The weaknesses in its economy and choppy geopolitical waters should give pause to those hoping for a China-led global revival

One of the instructive pieces of information that have emerged from the unfurling saga of Singapore oil trading giant Hin Leong's woes is the revelation about founder Lim Oon Kuin's faith in China's ability to control the Covid-19 outbreak, leading him to calculate that oil demand would revive from its swoon triggered by the shutdown on the mainland.

This apparently led to his fateful misjudgment that prices would rise thereafter, while in actual fact things turned out the other way.

As Bloomberg News reported in an excellent feature on the troubled firm, it was a gamble against all odds and the tycoon was indeed right to a degree. But what he failed to see was how the virus outbreak would turn into a global pandemic and paralyse the world.

There's a big lesson here about one-way bets, putting all eggs in a lone basket and missing out on the wider picture. And this is not the first time that has happened on this island.

That said, given China's outsize profile in the neighbourhood, its sturdy supporting role in past economic crises and an economy that has grown from about US$5 trillion a decade ago to more than US$14 trillion (S$19.9 trillion) now, you can follow Mr Lim's train of thought.

But what if his essential premise itself was flawed and China's economic situation is such that it was never in a position to step in to the extent that the region had expected of it?

Until a few weeks ago, most analysts - this writer included - had waxed confident that once Beijing had fine-tuned the details to take in the lessons from a decade ago, when it surprised the world with a four trillion yuan (S$805 billion today) stimulus package, it would reach back to the familiar playbook and announce another package that would spread cheer in the region. How could it not, given the geopolitical opportunity this presented to make Asia more dependent upon it?

But it hasn't happened. While the biggest economy - the United States - and even small but significant ones such as Singapore have launched efforts that amount to more than 10 per cent of their gross domestic product (GDP), China's has been modest.

It has cut rates and ordered big state companies to not delay paying dues to small and medium-sized companies - an insightful move, given that those firms are the little rockets that fire the mothership and are critical for maintaining employment as well, particularly in urban areas.


But put all the measures together and they come up to only around 4 per cent of GDP. As for regional influence, China seems to have opted for a muscular approach rather than fiscal generosity.

Why would Beijing be so hesitant to load up its economic cannon and fire? Some clues are available.


China's financial regulator, for instance, on Wednesday announced "vigorous" measures to restructure the country's banking sector, including removing "unfit" shareholders.

China needs to act swiftly here because the health crisis has steeply impacted an economy that had already settled into a wheeze, threatening the solvency of dozens of many small banks. The biggest of the property companies, China Evergrande Group, has debt approaching US$100 billion. According to The Wall Street Journal, the company owed suppliers US$93 billion last June, about double the previous year's accounts payable.

Last November, when a global pandemic was the last thing on anyone's minds, China's central bank had already been warning that the banking sector is "showing signs of strain", with more than 13 per cent of 4,379 lenders considered "high risk". This category included 586 banks and financing firms, the People's Bank of China said in its 2019 China Financial Stability Report. While many were focused on servicing the rural sector, they also included consumer finance firms.

Things have surely worsened since and the severe first-quarter contraction was a surprise only by its scale.

What's more, some indexes are plainly worrying, including the level of household indebtedness relative to household income. Research by Rhodium Group suggests that today, that gauge stands at 140 per cent - exactly what the figure for the US was a decade ago. Back then, China's figure for household debt to income was just 40 per cent.

In other words, the shoe is on the other foot. Whereas the US figure has scaled back from 2009 levels, China's has risen exponentially, limiting the ability of Chinese homes to take on more debt. At the least, this weighs on chances of a domestic demand-driven surge.

Externally, demand has cratered. While China has done much to transition from an export-driven growth model, trade still accounts for some 40 per cent of GDP. The deteriorating external environment is hurting not only its exports but also its sourcing of commodities, raw materials and manufacturing components. And it will likely get worse before it gets better.

"World GDP is now expected to fall by 3.9 per cent in 2020, a recession of unprecedented depth in the post-war period," Mr Brian Coulton, chief economist at Fitch Ratings, said in a note to clients yesterday. "This is twice as large as the decline anticipated in our early April update and would be twice as severe as the 2009 recession."


More worrying from a Chinese perspective should be the geopolitical environment. The US-China relationship is poised for a steep dive, with very little chance of improvement until the US presidential election is over. The latest Pew survey shows nine out of 10 Americans view China as a threat, and seven out of 10 do not have confidence in President Xi Jinping to do the right thing in world affairs.

In a telltale sign, despite the carnage on Wall Street, shares of major defence contractors such as Lockheed Martin and Northrop Grumman are barely 14 per cent and 12 per cent off their 52-week highs, respectively. That compares with, say, a major financial services company such as Citi, which was down 49 per cent from its 52-week high as of Wednesday night's close of trading.

While some of this can be blamed on the clumsy triumphalism projected by Chinese diplomats over their country's success at containing the virulent outbreak, there are signs of anti-Chinese sentiment coalescing in major global capitals.

Europeans have always tended to take a more nuanced view of China than their American counterparts. Yet, from Germany's biggest newspaper to politicians in Brussels, attitudes are hardening. Germany and the European Union are separately mulling over ways to keep out an expected flood of Chinese money seeking control of companies in strategic technologies.

This year, key economies such as France, Germany and India are scheduled to announce their picks on who will build their 5G telecommunications networks. Should Huawei be passed over despite its technological superiority, it would be a measure of where China stands with these countries.

Meanwhile, nearly a quarter of Japan's stimulus package consists of incentives for Japanese companies to shift production away from China.


Amid all of this, it would seem bizarre that China would stir the pot further by raising its assertiveness in the maritime commons, particularly the South China Sea.

Since February, its trawlers, operating under coast guard protection, have reportedly been scooping up marine life at will in Indonesia's exclusive economic zone, with Jakarta too distracted by the pandemic to respond. Last Saturday, Beijing approved setting up two districts to administer islands and reefs in disputed areas of the South China Sea, one to administer the islands and reefs of the Paracels, and the other, those of the Spratlys. Vietnam has duly lodged a protest.

One reason countries in the region have been reluctant to offend China is the perception that access to the mainland's market is essential for their continued prosperity. But, in a move uncharacteristic of it, the Philippines this month expressed, in strong language, solidarity with Vietnam over the sinking of one of its fishing vessels by the Chinese Coast Guard. It said "neither fish nor fictional historical claims are worth the fuse that's lit by such incidents".

Australia was among the earliest to ban Huawei from its 5G network. If its example is anything to go by, it looks as though more countries will resolve their "US for security, China for prosperity" dilemma in a similar manner.

Ignoring Chinese criticism, Australian Prime Minister Scott Morrison has pushed for an international investigation into the coronavirus pandemic, placing calls to US President Donald Trump, German Chancellor Angela Merkel and French President Emmanuel Macron. This week, an Australian frigate joined three US warships in conducting joint operability exercises close to where a Chinese survey vessel was operating in waters also claimed by Malaysia and Vietnam.

The commonly accepted wisdom is that China is using the distraction of the pandemic to tighten its potential to dominate the waters of the South China Sea. An equally plausible explanation is that some of this is also prompted by insecurity - a desire to secure its underbelly and its only access route to the vast oceans before things turn really sour for it.

There's another possibility, of course - that the Chinese military is acting on its own initiative and merely keeping the political leadership in the loop, rather than taking orders from it.

That would be a significant worry.

Join ST's Telegram channel and get the latest breaking news delivered to you.

A version of this article appeared in the print edition of The Straits Times on April 24, 2020, with the headline Risks of putting all eggs in China basket. Subscribe