China Economic Update: August 2016

China’s slowdown has hit export dependent East Asia

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Troubled trade – China’s slowdown has hit export dependent East Asia

  • The rise of China as a major global economy had significant impacts on the broader East Asian region, with these highly trade dependent economies benefiting from the growth in volumes across most of the 2000s and the first half of this decade. However, China’s slowing growth over the past few years has had flow on effects to these economies – with weak intra-regional trade contributing to sub-trend economic growth in the East Asian region.
  • The changing pattern of China’s growth – away from heavy industry towards less resource intensive service sector growth – has seen the country’s imports contract more recently. While some of this decline reflects weaker commodity prices, we estimate that volumes have also fallen – down 4.1% yoy in the first seven months of 2016.
  • The value of East Asian exports to China peaked in late 2013 and has trended downwards since. This trend goes beyond the impact of weaker commodity prices alone – with weaker imports from predominantly commodity exporters like Indonesia (down 14.5% in 2015) matched by lower values from manufacturing exporters like Taiwan (down 13.4%).
  • Compared with other regions globally, East Asian economies are particularly trade dependent and the weakness in global trade volumes in recent years has resulted in a period of sub-trend economic growth. From trend growth at around 5% between 2000 and 2008, East Asian economic growth has fallen below 3.5% in early 2016 – with lower export revenues having both direct impacts on GDP accounting – through the net export component – as well as indirect effects. Export oriented corporates have seen weaker profit conditions and are less inclined to invest (given weak export growth prospects), while workers have seen wage growth negatively impacted – slowing potential growth in domestic consumption.
  • While predominantly commodity based exporters face weaker demand growth in coming years, higher value add producers (such as South Korea and Taiwan) may face increased competition – as Chinese manufacturers attempt to push higher up the value chain – posing longer term threats as well. As a result, East Asia’s growth prospects are set to remain considerably weaker than the pre-GFC period.

For further details, please see the attached document: