China has become the bellwether for Asia, according to a July 16th report from Deutsche Bank Research. DB Chief Economist Taimur Baig, PhD. and team argue that the ongoing slowdown in the Chinese economy will have a ripple effect across the continent. They note that even if China is really growing at 7% (a number which many dispute), it is undeniable that China is growing a lot slower than in the past and the impact on other Asian countries will be large.
As a result, DB is scaling back its 2015 growth forecasts for Hong Kong, Indonesia, Singapore, South Korea, Taiwan and Thailand, and also reduced its EM Asia (not including China and India) forecast for the year by 40 bps to 3.9%.
Risks from a China slowdown
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Baig et al. highlight that Asian economies face a number of risks from a China slowdown. The most obvious risk is trade, given that many Asian economies rely on demand for both raw materials and finished goods from China. They point to the relatively weak export performance across a broad range of Asian economies in the last couple of quarters, and say most of the issues result from weakness in China.
Several Asian nations have also seen their bank and non-bank financial sectors become more exposed to China over the last few years. While past and current loans to Chinese businesses reflect limited credit and currency risk, these assumptions may not hold true in the future.
Chinese spending is another major factor to consider. The rapidly growing number of high net worth individuals are a key source of income for the tourism, property, gaming, and wealth management sectors throughout Asia. By the same token, Chinese businesses continue to provide a large percentage of the capital in regional financial markets.
Baig and colleagues note: “This type of exposure is relatively new, and as China slows, will provide a new set of challenges to Asian economies that have become increasingly dependent on the regional giant.”
Outlook for Asia for 2H 2015
As far as the outlook for the rest of 2015, Deutsche Bank argues that public investment will likely support continued growth in China, India, Indonesia, Thailand, and the Philippines. On the other hand, the report notes “the open economies of Asia with substantial exposure to the global trade cycle, such as Singapore, South Korea, Malaysia, and Taiwan, downside risk from further export-related disappointment remains high.”
Baig and colleagues end the report with a warning, highlighting that:”…the second largest economy in the world is growing substantially below trend, with downside risks galore.”