China’s government is trying to deflate a massive credit bubble and to steer away from a growth model based on debt-fuelled investment and exports, to one based more on domestic consumption and services.
Whether China’s landing ends up being hard or soft, it will have a major impact on the rest of the region. So which countries in the vicinity will suffer most from a Chinese slowdown?
As Morgan Stanley points out, China now accounts for 55% of the output of Asia (excluding Japan) and a quarter of the region’s trade – 25% of the region’s exports now head to China, up from 14% in 2001.
On this front, Singapore, Taiwan and Korea, in that order, are the most exposed. Singapore’s exports to China and Hong Kong amount to almost a quarter of its overall foreign sales, and 33% of GDP.
Taiwan’s figures are 40% and 25% respectively; and Korea’s 30% and 15%. Korean and Taiwanese exports to China, combined, fell by 2.3% year-on-year in May.
There is also “a tight linkage” between the region’s export and investment growth, notes Morgan Stanley, so subdued exports will undermine domestic momentum.
Hong Kong, Singapore and Taiwan, major regional financial centres, have rapidly increased their loans to Chinese firms in recent years. China’s subdued commodity demand is a headwind for the region’s three net commodity exporters, Indonesia, Malaysia, and Australia.
The country with the least China exposure is India, as it has a large domestic market and isn’t a net seller of raw materials. India’s exports to China and Hong Kong comprise just 1.5% of its national income.