Taking stock of China’s slowdown – Nikkei Asian Review



Motorcyclists wait at traffic lights in Ho Chi Minh City (Photo: Simon Roughneen)

Motorcyclists wait at traffic lights in Ho Chi Minh City (Photo: Simon Roughneen)

HO CHI MINH CITY/SINGAPORE —  The 10 member countries of the Association of Southeast Asian Nations collectively do more business with China than with any other country, with bilateral trade between the two sides growing by an annual 8.3% in 2014 to $480 billion, according to Chinese government figures.

But since mid-2015, slowing Chinese growth and a weaker yuan have fueled fears in Southeast Asia that the region has become too dependent on China’s vast markets.

China has allowed the yuan to fall by 5% against the dollar, signaling that it may opt for a devaluation to make its exports more competitive.

Manu Bhaskaran, chief executive of Centennial Asia Advisors, an economic advisory company, believes that a further weakening of the yuan could trigger competitive devaluations across Asia. “What is the knock-on effect on other currencies? Probably down,” Bhaskaran told the Nikkei Asian Review.

Vietnam, a comparatively small economy with a gross domestic product less than a quarter the size of Indonesia’s, is nonetheless expanding faster than most other countries in Asia, with a growth rate of 6.7% expected for both 2015 and 2016.

But Vietnam has already devalued its currency, the dong, largely in response to the weakening yuan, while Chinese businesses are trying to offload surplus goods onto the Vietnamese market, widening an already massive trade deficit. Vietnam’s imports from China amounted to $45 billion in 2015, against exports to China worth $15.5 billion, according to the Vietnam Chamber of Commerce and Industry.

“Chinese companies are flooding the Vietnamese market and driving prices low, making it hard for Vietnamese companies to compete,” said Michel Tosto, head of institutional sales and brokerage at Viet Capital Securities.

Bucking the ASEAN trend however, Vietnam’s exports to Japan and the U.S. are worth three times what it sells to China, and that gap is likely to grow if the planned Trans-Pacific Partnership — a U.S.-led trade deal comprising 12 countries now in the process of ratifying the pact — takes effect.

Vietnam is increasing trade with Western countries as tensions grow with China over the disputed territories in the South China Sea, known as the East Sea in Vietnam. Rivalries over control of Vietnam’s ruling Communist Party, which is currently in the midst of a leadership contest, center partly around Vietnam’s acrimonious relationship with China.


The combination of economic uncertainty in China and lower costs in Vietnam could result in increased foreign investment in Vietnam, according to some analysts.

“Many Asia investors will lessen their exposure to China and increase investments into Vietnam given its current solid macroeconomic environment, tax incentives, cost of operating in the country and the numerous free trade agreements being signed or negotiated at the moment,” said Alberto Vettoretti, managing partner of Dezan Shira & Associates, which advises companies investing in Asia.

Since 2013, ASEAN has attracted more foreign investment than mainland China, according to the United Nations Conference on Trade and Development, with Vietnam’s wages — around half of China’s — a major draw for manufacturers looking for an alternative to China.

ASEAN’s wealthiest member, Singapore, is potentially more at risk from a China slowdown than Vietnam. The city-state’s trade-to-GDP ratio is a massive 300%, with almost 15% of Singapore’s exports going to China, according to Australia’s ANZ Bank. The bank projects that a 1% annual drop in China’s GDP growth would mean 1.4% less growth for Singapore, where GDP grew by 2.1% in 2015.

In contrast to companies in other ASEAN countries, Singaporean businesses are major investors in China, while 41% of Chinese foreign direct investment in ASEAN went to Singapore, according to 2013 figures from the Chinese Ministry of Commerce.

“In Singapore, the slowdown took a toll on manufacturing as biomedical production and transport engineering suffered output declines,” said Ho Meng Kit, chief executive of the Singapore Business Federation. “Growth also moderated in services, notably wholesale and retail trade and business services.”

International Enterprise Singapore, a government agency, said on Jan. 17 that Singapore’s exports dropped by 7.2% in December 2015. The agency attributed much of that decline to a 18.7% fall in exports to China.

China accounts for at least 10% of exports from ASEAN’s biggest economies, which include Indonesia, Malaysia, Philippines and Thailand, while the region’s smaller, less-developed economies — such as Cambodia, Laos, Myanmar and Vietnam — are destinations for Chinese natural resource investment and Chinese manufacturing exports.

While China continues to enjoy faster economic expansion than does the West or Japan, its 6.9% annual growth rate for 2015 represented a quarter-century low. That means resource-rich countries such as Indonesia, Laos and Myanmar can expect to sell less coal, gas, minerals and oil to China.

Jia Qingguo, dean of international studies at Peking University, believes that China is undergoing an economic transition after more than two decades of massive growth and modernization that created huge demand for natural resources and sparked a commodities boom in neighboring countries.

“China has to reduce the import of raw materials, and the surplus of products in China will probably mean lower prices for Chinese exports,” Jia told the NAR.

Ho of the Singapore Business Federation said businesses need to adjust to changes in China, where the slowdown “could reflect a structural shift from a manufacturing economy to one based more on domestic consumption and services.”

Governments across Southeast Asia will also have to change tack to accommodate a slowing China. In Indonesia, the region’s biggest economy, that could prompt some badly needed reforms. Indonesia has enjoyed a lucrative commodity boom in the last decade due to soaring Chinese demand for the country’s coal, copper, nickel and other minerals. “The boom in commodity prices allowed for lazy growth,” Bhaskaran said.

Indonesia’s government under President Joko Widodo has pledged to spend hundreds of billions of dollars on upgrading roads, rail networks, ports and airports in a bid to boost annual growth to 7% from the current 4.7%, which is substantially down from the 5-6% growth enjoyed during the commodity bonanza.

With China’s demand slowing, Indonesia will have to focus on “the hard work of tackling vested interests and improving infrastructure,” said Bhaskaran.

Indeed, China is likely to play a key role in Indonesia’s infrastructure plans, with Beijing recently winning a contract to build a high-speed rail link between Jakarta and Bandung, Indonesia’s third-biggest city. Also, China is promoting its new Asian Infrastructure Investment Bank as an alternative to Western and Japanese-backed lenders such as the World Bank and the Asian Development Bank.

It is too early to say, however, whether China’s slowdown will result in Beijing pulling back from infrastructure commitments overseas. International Monetary Fund head Christine Lagarde said on Jan. 23 that “we are not seeing a hard landing [in China],” an outcome that would likely see China stay on track with its overseas spending plans.

For Asian companies, that would mean continued competition for contracts to build new road, rail, air and maritime links in growing Southeast Asian economies.

Although Japan has recently lost out to China on some lucrative infrastructure deals in the region, including Indonesia’s Jakarta-Bandung high-speed rail project, Japanese companies Sumitomo Corp. and Shimizu Maeda Joint Operation won contracts to build new commuter rail lines in congested Ho Chi Minh City, Vietnam’s biggest urban area and the source of a quarter of the country’s GDP.

“I will still prefer to drive my bike than go by train, but I hope the new train will make the traffic less bad,” said Pham Huong, a passerby who had stopped to take a photo beneath a crane at a railway construction site as thousands of motorcyclists buzzed past during the evening rush hour.

Construction site for the new metro in downtown Ho Chi Minh City (Photo: Simon Roughneen)

Construction site for the new metro in downtown Ho Chi Minh City (Photo: Simon Roughneen)

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