China’s economic slowdown begins to hit Asia’s export hubs even before trade war begins to bite
- South Korea, Malaysia, Singapore and Taiwan among those heavily exposed to China, even before trade war with the United States begins to take hold
- Lead economist at the Asian Development Bank says ‘it’s difficult to find anything positive to bank optimism on’ in emerging Asia
The stuttering Chinese economy is having a knock-on effect throughout Asia, with many emerging markets suffering a weak end to 2018 leading analysts to predict a tough year ahead for some of the region’s major exporting hubs.
Manufacturing data for December disappointed in Malaysia, Myanmar, Taiwan and Thailand in the final month of 2018, suggesting weak production across the board over the fourth quarter.
South Korea’s purchasing managers’ index (PMI) improved slightly on a dismal performance in November, but still languished at 49.8 – with anything below 50 for the a gauge of manufacturing performance considered as a contraction.
Furthermore, Korean exports contracted by 0.8 per cent year-on-year in December.
Korean data is considered a good barometer for regional trade, which suggests exports across Asia’s economies will also have suffered a poor end to the year.
Significantly, Korea’s exports to China fell by 13.9 per cent year-on-year, with sales of semiconductor to China, among the nation’s most important and valuable exports, falling by 8.3 per cent.
In the final quarter of 2018, Singapore’s economic growth missed analysts’ expectations, growing by just 1.6 per cent on the previous quarter, well below the 3.5 per cent forecast by a pool of economists questioned by Reuters.
“Unfortunately 2019 causes very little room for optimism. I can see the US start to slow down, the euro zone is flat, and Asia has a lot of uncertainty related to the rest of the world,” said Jayant Menon, the lead economist at the Asian Development Bank.
“So, what is the positive signal? There isn’t one. It’s difficult to find anything positive to bank optimism on.”
Crucially, the figures mirror a similar slowing trend within China after on Wednesday it was announced that manufacturing is contracting in the mainland, with the Caixin PMI, which tracks the activities of small and medium-sized enterprises, dipping below 50.0 for the first time since May 2017, down 0.5 points to 49.7.
This is reflective of a slowdown in domestic demand, which affects businesses within China as well as the large base of exporting companies outside it.
“This means not only that the export sector faces shrinking manufacturing activities, but that the domestic manufacturing sector in general also faces contraction,” wrote Iris Pang, China economist at ING, in a research note published on Wednesday after the Caixin PMI was released.
Alex Holmes, Asia economist at research firm Capital Economics, said that he expected an economic slowdown “across the board” in emerging Asia, with the common factor in those announcing disappointing data early in 2019 being their exposure to China.
“The PMIs are more reflective of actual orders, not sentiment. But it’s likely that all this talk of the trade war and the uncertainty around it is going to impact business investment,” he said.
As yet, it is difficult to quantify the impact of the trade war with any great precision. Through the second half of 2018, many export orders were front-loaded, in a bid to avoid the increase in US tariffs on US$200 billion of Chinese goods from 10 per cent to 25 per cent.
This was scheduled to take effect on January 1, but will now come into force on March 2 should negotiators from both sides not reach a permanent agreement in the ongoing talks.
“We’re not hopeful they’ll get a deal, so export growth will slow down sharply,” Holmes said.
There is anecdotal evidence that the trade war is already having a chilling effect on investment decisions.
A survey of US firms in China conducted by the American Chamber of Commerce in Shanghai between August 29 and September 5 found that more than 60 per cent of respondents said the tensions “negatively impact their companies”.
It all amounts to a time of great uncertainty for the economies of Asia, and all eyes will be on an expected meeting of high level trade negotiators from China and the US this month, the details of which have yet to be confirmed.