Macro Insights Weekly: China slowdown and Asean
- Asia faces many macro risks, but a slowing China in not at the top of the list
- Global inflation threat is a non-China factor
- Chinese tourists have been largely non-existent since 2020, hence there is no additional downside
- Asean’s trade with China is a global demand beta that can withstand a domestic demand slowdown
- US interest rates, global capital flows, and food/fuel prices matter more for Asean
Commentary: China slowdown and Asean
China’s nominal GDP was USD17.5trln in 2021, compared to USD14.9trln in the previous year. The year-on-year expansion of USD2.6trln was 22% larger than the expansion of the US. As the largest contributor to global growth, China’s 2022 outlook matters for the rest of the world, particularly Asean, but by how much?
We examine Asean’s reliance on China’s growth by running growth regressions for each Asean country for the period 2005-21, with three independent variables on the right-hand side, real GDP growth rates of China and the US, as well as change in oil prices. We run the exercise using both quarterly and annual data, and find similar results: China matters for Asean growth, but the US much more so. The coefficient estimates vary, but in all cases, the US enters the regression results with a substantially greater magnitude than that of China.
The reason for this is clear; China’s trade linkages with the region are deep and growing, but they are still largely a function to the global trade dynamic as opposed to China’s domestic demand. Many goods produced in Asean countries are intermediate inputs in the supply chain, which go to China for assembly. The linkage also works in reverse; a large chunk of the region’s imports are made-in-China inputs for autos, electrical, and electronics assembly. As long as global demand is holding up, China’s domestic demand headwinds won’t cause regional trade to suffer greatly, in our view. With respect to global demand, the US outlook remains key, as per our analysis.
But what about the large tourism flows from China? Of course, the Chinese have made up for a very significant part of regional tourism in recent years, and a resumption of tourist flows would be supportive of the growth outlook, but given that such flows had trickled to a halt since the spring of 2020, the lack of upside in 2022 won’t really matter, as the base is all but zero.
Granted, the China slowdown dynamic is not helpful. But the key headache stemming from the high price of food and energy has little to do with China, the culprit being the war in Ukraine and other supply-side constraints. If anything, a slowing of Chinese demand could help the commodities inflation outlook.
Additionally, headwinds are coming from rising interest rates, capital flow volatility, and pressure on currency markets. Yet again, these complications are a function of the US Fed’s monetary policy direction, with the PBOC a largely passive actor.
We believe that between the resumption of tourism (even without those from China and Russia), continued demand for exports, and moving past the pandemic, Asean growth could well hold up this year, even as the outlook of China remains beset with uncertainty.
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