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
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.
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.
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.
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.
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.
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