Assessing the Impact of China’s Economic Slowdown on Asia
After three decades of rapid economic growth at a pace averaging 10% per year, China is going through a major structural transformation. Asian Megatrends assesses the impact of China’s economic transition on the rest of the Asia. While China’s economic growth momentum is expected to moderate further over the medium-term outlook, China’s economy is forecast to become the largest in the world within a decade, overtaking the US. Helped by China’s economic ascendancy the Asia-Pacific region is forecast to remain the fastest growing region of the world economy, with growth supported by innovation and change through strategies such as the “One Belt One Road” initiative.
China’s Economic Slowdown
With China being the world’s second biggest economy and by far the largest economy in the APAC region, the outlook for China will be a key factor determining the prospects for the rest of the Asia-Pacific region.
The rapid growth of the Chinese economy over the last decade has resulted in China’s share of world gross domestic product (GDP) rising from 5% in 2005 to an estimated 15% in 2015. This has made China an increasingly important export market for many Asia-Pacific countries as well as a key engine for world growth. In 2014, China accounted for 35% of Australia’s total exports, 25% of South Korea’s, and 20% of Japan’s. Exports to China from the Association of Southeast Asian Nations (ASEAN) have grown at a pace of approximately 20% a year over the last decade.
China’s growing prominence as a market for exports from its APAC neighbors, however, has increased their vulnerability to a Chinese economic slowdown. The pace of Chinese economic growth has moderated in recent years, falling from 10.6% in 2010 an estimated 6.9% in 2015. The medium term outlook for Chinese economic growth is for growth momentum to stabilize at a pace of around 6.5% per year over the next five years, which will continue to make China a key growth engine for the global economy.
The Chinese economy is expected to continue to experience fundamental structural change and transformation, with the manufacturing sector undergoing adjustment and rationalization due to overcapacity in some key industries as well as the gradual decline in competitiveness of low-cost manufacturing. Meanwhile consumption is becoming an increasingly important growth driver, contributing around 54% of GDP growth in 2015. The rapid growth in Chinese consumer spending is expected to fuel rapid growth in many sectors of services, including financial services, healthcare, retail trade and logistics. Over the next two decades, one of the key megatrends transforming the global economy will be the rise of Chinese consumption, which will become an increasingly important growth driver for the global economy, particularly as the pace of growth in consumer spending in the advanced economies of the US, EU and Japan remains modest at best.
“One Belt, One Road”
While the Chinese economic slowdown that has been underway since 2011 will continue to have transmission effects to the rest of APAC, new innovation and change will also be key factors transforming the structure of the Asia-Pacific economies. Chinese manufacturing will continue to undergo gradual transition from low-cost manufacturing towards higher value-added manufacturing, as planned in the Chinese government’s “Made in China 2025” strategy. For the APAC region, a key long-term growth driver will be China’s “One Belt, One Road” initiative. This will be catalyzed by new infrastructure financing for Asian emerging markets from the recently launched Asian Infrastructure Investment Bank, the Silk Road Fund, as well as a number of Chinese bilateral infrastructure financing commitments to a number of Asian countries. Many countries in Southeast Asia and Central Asia are expected to benefit from the “One Belt, One Road” initiative, which will help to accelerate the development of the Greater Mekong Sub-region as a new global hub for low-cost manufacturing.
Shock Waves from a Hard Landing
The Chinese economy still has many economic imbalances, including the slowdown in residential construction since 2013, excess capacity in some key industrial sectors, and the rapid rise of unregulated shadow banking loans between 2010 and 2014. Due to these accumulated imbalances, the risk of a hard landing in China is one of the key potential risks facing the world economy over the medium-term outlook. If China were to have a hard landing with GDP growth slowing below 5%, this would create significant economic shock waves to the rest of the Asia-Pacific, with the most vulnerable economies including South Korea, Taiwan, Hong Kong, Singapore, Malaysia, and Thailand. A key factor mitigating the risk of such as hard landing scenario is that any further significant moderation in growth would be likely to trigger additional monetary and fiscal policy stimulus measures from the Chinese government to maintain GDP growth momentum at around 6.5%.
While Asia continues to face many risks, in my book Asian Megatrends, I highlight that geopolitical risks resulting from China’s ascendancy remains a key challenge. Unresolved territorial disputes still result in political and military tensions in many parts of Asia. In 2016, the spotlight will continue to be on the territorial disputes in the South China Sea between China and several ASEAN nations, notably the Philippines and Vietnam. Meanwhile China and Japan also have territorial disputes in the East China Sea over the Senkaku/Diaoyu islets.
After decades of strengthening economic co-operation across much of Asia, there are new risks emerging of escalating tensions which could threaten the future economic ascendancy of the Asia-Pacific and could derail regional co-operation.
In Asian Megatrends, I argue that Asian governments must build up a new regional political architecture with a regular high-level political dialogue process to underpin regional peace and co-operation. This will help to ensure that Asia’s economic development can continue without being disrupted by regional geopolitical tensions and potential conflicts.
Despite the fragile global recovery and downside risks, the APAC region is still expected to be the fastest-growing region of the global economy in 2016, supported by China’s continued economic ascendancy. The “One Belt One Road” initiative, as well as the creation of the AIIB and Silk Road Fund, will continue to make the APAC region the most dynamic part of the world economy in the decades ahead.
Rajiv Biswas is the author of Asian Megatrends, is Senior Director and Asia-Pacific Chief Economist at IHS Markit.