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Workers assemble ice skates at a factory in Zhangjiakou, in northwestern China’s Hebei province, on July 15. China’s retail sales and industrial production growth weakened in July as floods and Covid-19 outbreaks disrupted consumption and supply chains. Photo: AP
Opinion
Macroscope
by Sylvia Sheng
Macroscope
by Sylvia Sheng

Why China’s slowing growth need not worry emerging Asia

  • China’s slowdown is likely to weigh on the export performance of its regional trading partners, but policy easing by Beijing and solid demand from major developed economies are likely to mitigate the impact
Sylvia Sheng
Sylvia Sheng
Why you can trust SCMP
Investors’ perception of the greatest tail risk from China has shifted notably in recent months. Earlier in the year, overtightening of macro policies in China was viewed as a key risk to the global economic recovery.
More recently, these concerns have given way to growth concerns following the disappointing July activity data and weak August PMI figures.
Most economists had been expecting China’s growth momentum to slow in the third quarter, in part reflecting the impact of tighter policies earlier in the year. However, the speed of the slowdown was much sharper than expected.

Given the close economic links, slower growth momentum in China casts a shadow over the growth outlook for the rest of emerging Asia, mainly through the trade channel.

Among the major growth drivers, exports have been a bright spot for the region since the start of the pandemic while consumption has lagged. Emerging Asia’s exports have been supported by China’s strong growth rebound as the first economy to emerge from the Covid-19 crisis.

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China’s economy rose 7.9 per cent year on year in the second quarter of 2021

China’s economy rose 7.9 per cent year on year in the second quarter of 2021

After a notable decline in the second quarter last year when Covid-19 first hit, export volume from emerging Asia excluding China rebounded quickly to its pre-pandemic level in the third quarter. This recovery is faster than in previous cycles. For example, following the 2008 global financial crisis, it took almost two years for exports in the region to return to pre-crisis levels.

Slowing growth in China is likely to weigh on the export performance of its regional trading partners, but a few factors will help mitigate the negative impact. First, the weakness in China’s growth is likely to be concentrated in consumption and property investment for the remainder of 2021, to which emerging Asia exports are less sensitive.
The slump in China’s August services purchasing managers’ index points to a sharp deceleration in service activities as a result of the Delta-variant-driven wave.
There are signs that the latest outbreak in China is under control. However, social distancing measures are only likely to be relaxed gradually under China’s “zero tolerance” policy. This will remain a weight on consumption demand, especially service consumption.
That said, imports tend to account for a smaller share of consumption than investment. Most services that people consume are provided locally rather than imported, limiting the impact on regional exports.

On the investment side, there is room for China’s manufacturing investment demand to strengthen, helped by improving corporate profitability despite an expected property investment slowdown amid tighter property policies.

This shift in the composition of investment demand is likely to favour exports from the rest of emerging Asia, given that they are more exposed to capital goods than commodities demand.

More importantly, countercyclical policy easing in China should limit growth risks. The People’s Bank of China (PBOC) has clearly shifted to a dovish stance after cutting the reserve requirement ratio in July.

The higher-than-expected amount of medium-term lending facility rollover in mid-August signals that the PBOC would like to keep interbank liquidity relatively ample and remain accommodative.

Recent policy meetings suggest policymakers are focused on maintaining growth within a reasonable range, with greater emphasis on the smooth transition of macro policies from this year to next. As a result, more easing measures are likely to be rolled out in the coming quarters to shore up growth.

At the same time, external demand from major developed economies should remain solid. While we could see a shift in US consumption towards services as social distancing measures ease, strong capital investment demand should provide support for emerging Asia’s exports.

In addition, overall US inventory levels are low. Businesses are running down their stocks because of supply constraints in raw materials such as computer chips. Once we move past these bottlenecks, strong restocking demand should also boost US import demand.

Moreover, the pickup in euro-zone domestic demand from economic reopening should provide an additional source of support for regional exports.

The external demand picture is important for emerging Asia, given that regional consumption recovery is under threat amid the Covid-19 resurgence. Slower economic growth in China is likely to be a near-term headwind for exports from the rest of the region.

But China’s growth slowdown will have a limited impact on its regional trading partners. Policy easing in China and solid demand from major developed economies are expected to mitigate the negative trade effects.

On the whole, an increase in vaccinations – especially in parts of Southeast Asia – is key to stabilising the Covid-19 situation and driving a growth recovery in the region.

Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management

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