China's economic slowdown threatens Asia's economic outlook

419
3
China's economic slowdown threatens Asia's economic outlook

SINGAPORE SEOUL Reuters - China's economic setbacks have darkened the outlook for countries in its orbit, from South Korea to Thailand, as a sharp factory slowdown and trade bottlenecks in the world’s second largest economy hit Asia on the supply and demand sides.

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

The slippage poses new risks to China's trading partners during the global recession, which is shaping up as a bumpy recovery after the pandemic slump.

Yes, growth elsewhere, namely the US and Europe, appears robust, says Frederic Neumann, co-head of Asian economics research at HSBC. But it is Asia that's been the main driver of growth across the region - and as it sputters, China economies will lose much of their torque. HSBC analysis showed Asia-Pacific economies from South Korea to New Zealand far more sensitive to changes in China's growth than they were to changes in U.S. or European GDP.

For every percentage point China added to its growth, trade powerhouse South Korea reported about 0.75 of the maximum growth of China, the bank's economists said.

According to the analysis, South Korea was one of the most sensitive nations to change in Chinese growth followed by exporting nations Thailand and Taiwan.

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

A Reuters Group Market Survey last week showed that a majority of Japanese firms were concerned that a slowdown in China, Japan's largest trading partner, would affect their business.

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

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

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

China's iron ore prices have risen since hitting a record in mid-May, with demand hurt by the steel output curbs and the current property slowdown.

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

Despite the risks from China, analysts say Asia will be able to prevent a precipitous collapse of domestic demand, as improved vaccination rates allow countries in the region to shake off COVID - 19 restrictions.

The demand for other goods, such as fuel and food, remains however firm. That means for now, central banks are unlikely to swerve from their general shift away from crisis era monetary settings.

So far, China's manufacturers and exporters have yet to significantly reduce the costs caused by supply shortages of everything from coal to semiconductors.

But analysts warn that the problem around inflation is fluid.

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

I believe it could now be a bit of a double whammy. Because China is one of the economic engines for the region, any contraction in China could impact the demand for regional goods and services, says Selena Ling, head of treasury research and strategy at OCBC Bank.

In all likelihood, Secondly, the continuing power crunch by Policymakers will prioritize home use over industrial activity. So that could exacerbate global supply chain disruptions.