Spillover impact of China slowdown on Asia to be considerable: ADB

Tokyo

AS China's economy slows and shifts emphasis from manufacturing to service-based industries, the rest of Asia will be hit more strongly than other areas of the world while the impact will vary by country and by sector, says the Asian Development Bank (ADB) in a new report.

The report attempts to quantify what up to now have been more generalised warnings about the impact that the partly-planned slowdown in the world's second largest economy is likely to have on the rest of Asia and beyond.

Asian commodity exporters will continue to be worst affected but other Asian economies with strong trade links to China - Taiwan, Vietnam, Mongolia, South Korea, Hong Kong and Malaysia especially, but also Singapore, Thailand, Indonesia and the Philippines - are vulnerable, the report says.

The decline in China's growth is expected to reduce gross domestic product (GDP) growth in the rest of developing Asia by around one third of a percentage point annually over the next two years, while it will also reduce Japan's growth by one fifth of a point, according to the ADB.

But while China's slowdown and economic transition poses a challenge for the rest of Asia, it also represents an opportunity for those countries in the region that are able to replace China in segments of global production chains, the report suggests.

"Global demand for products that China produces in quantity - ranging from low cost T-shirts to high-tech smartphones and computers - continues to rise. But with China's rising labour costs, production will move increasingly to lower-cost economies" such as Vietnam.

Concerns over a sharp slowdown in China in the near term are exaggerated, says the ADB. But credit booms and busts, housing downturns and financial crises elsewhere suggest that, in a worst case scenario, China's growth could drop 4.5 percentage points from earlier peaks.

"Strong, intra-regional trade and production linkages" account for the marked impact on the rest of Asia, while the impact on other commodity exporters such as Australia will also be "significant". The impact on the US and Europe will be "negligible" while global growth will be cut by around one third of a percentage point.

Every one percentage point drop in China's growth lowers the prices of coal and metals and also those of oil and natural gas. Tin prices drop 22 per cent, aluminium 12.4 per cent, coal 12.8 per cent, copper 6.7 per cent, oil 6.9 per cent and natural gas 4.7 per cent, ADB models suggest.

"For many Asian commodity exporters, China is a major customer for dominant export commodities such as coal, copper and oil. These findings drive home the importance of diversification for Asia's commodity exporters, across products as well as trading partners," the ADB suggests.

"Beyond commodity exporters, other economies that export more to China are vulnerable to a slowdown in demand," the report says. "Beyond ASEAN and economies such as Taiwan, South Korea and Hongkong, the impact of China's slowdown tapers off quickly to minor or negligible."

What the ADB terms a continuing "downdrift" in China's annual economic growth to below 7 per cent (or by a total of 2.6 percentage points since 2011) reflects structural and demographic factors as well as cyclical factors such as external demand, says the ADB.

Meanwhile, "high frequency economic indicators such as industrial production, retail sales and electricity consumption suggest that the decline in growth could be more pronounced than headline GDP figures suggest". On the other hand, Chinese data may not fully capture growth in new sectors.

So far, growth in service activities and of domestic consumption in China, "while reasonably robust", has not offset the declines in industrial output and investment, as these latter sectors are most import-intensive and "spillovers from the current moderation could be larger than in the past".