China's economic slowdown and supply bottlenecks hit Asia

SINGAPORE SEOUL, Oct 19 Reuters - China economic setbacks have darkened the outlook for countries in its orbit, from Thailand to South Korea, as a sharp factory slowdown and trade bottlenecks hit Asia on the supply as well as demand sides.

China's gross domestic product fell in the second quarter, data showed this week, with growth hitting its weakest in a year, hurt by power shortages, supply chain snags and a property market crisis.

For China's trading partners, the slippage presents new risks to what is shaping up as a bumpy global recovery from pandemic slump.

Yes, growth elsewhere, namely the US and Europe, appears robust, writes Frederic Neumann, co-head of Asian economics research at HSBC. However, China has been the main engine for growth throughout the region and then Chinese economies will lose much of their torque if it sputters. HSBC analysis showed Asia-Pacific economies from South Korea to New Zealand far more correlated to changes in China's growth than they were to changes in U.S. or European GDP.

For every percentage point South Korea added to its growth, trade powerhouse China reported about 0.7 of the point of other growth, the bank's economists said.

The analysis found that Taiwan was by far the most sensitive to changes in China growth, followed by exporting nations Thailand and South Korea.

An anticipated Chinese slowdown has already prompted Citi analysts to downgrade growth projections for economies in the region, including South Korea, Taiwan, Malaysia, Singapore and Vietnam.

A Reuters Corporate Survey last week showed a majority of Japanese firms were concerned that a slowdown in China would affect their business operations.

The slowdown is being felt across most of China's economy, from the factory to retail sectors, which has experienced its weakest output growth since the start of the pandemic.

China's auto sales slumped 19.6% in September from a year earlier, industry data showed last week, falling for a fifth consecutive month amid a prolonged global shortage of semiconductors and the power crunch.

Likewise, sharp declines in new construction starts in Australia's property market due to a regulatory crackdown, can loom as risks for exporters of raw materials, such as China.

China steel production has halved since hitting record in mid-May, with demand affected by slowing of iron ore prices and the property market breakdowns.

Last week, mining giant Rio Tinto reduced its 2021 iron ore shipments forecast, mostly due to tight labor market conditions in Australia, but also warned of headwinds from China's regulatory crackdown.

Despite the risk from China, analysts say Asia will be able to reverse a precipitous collapse in domestic demand as improved vaccination rates allow countries in the region to dump COVID - 19 restrictions.

The demand for some items, such as fuel and food, remains strong also in China. That means that most central banks are likely to shift their general shift from crisis era monetary settings for now.

What about China's manufacturers and exporters have yet to significantly pass on higher costs caused by supply shortages in everything from coal to semiconductors.

Analysts warn: Optimal inflation is fluid.

While weaker demand could relieve pressure on prices, supply chain bottlenecks could create a stagflation nightmare in which surging prices are accompanied by stagnant growth if unresolved.

I suspect it could become a bit of double whammy now. Because China is one of the economic engines for the region, any slowdown can affect the demand for regional goods and services, said Selena Ling, head of treasury research and strategy at OCBC Bank.

Secondly, the ongoing power crunch, in all likelihood, will policymakers prioritise home usage for Winter Demand over industrial activity. That could only intensify global supply chain disruptions.