GLOBAL ECONOMY China’s economic wobble casts long shadows on Asia

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An employee works at a nonwoven filter fabric factory, where the fabric is used to make surgical face masks, in Taoyuan, Taiwan, March 30, 2020. REUTERS / Ann Wang

SINGAPORE / SEOUL, Oct. 19 (Reuters) – China’s economic setbacks have tarnished prospects for countries in its orbit, from South Korea to Thailand, as severe factory slowdowns and trade shortages in the world’s second-largest economy, Asia, hit supply, like as well as demand sides.

China’s gross domestic product stalled in the third quarter, data this week showed, with growth hitting its weakest level in a year, hurt by power shortages, supply chain problems and a housing market crisis. Continue reading

For China’s trading partners, the slip brings new risks to a bumpy global recovery from the onset of the pandemic.

“Yes, growth elsewhere, namely in the US and Europe, appears robust,” wrote Frederic Neumann, co-head of Asian economic research at HSBC. “But it’s China that has been the main engine of growth in the entire region – and when it bubbles, Asian economies will lose much of their torque.”

HSBC analysis showed that Asia-Pacific economies from South Korea to New Zealand correlated much more strongly with changes in Chinese growth than with changes in US or European GDP.

For every percentage point China added to its growth, trading power South Korea reported about 0.7 points of additional growth, the bank’s economists said.

According to the analysis, South Korea was by far the most sensitive to changes in Chinese growth, followed by the exporting nations Thailand and Taiwan.

An expected slowdown in China has already prompted Citi analysts to downgrade growth projections for economies in the region, including South Korea, Taiwan, Malaysia, Singapore and Vietnam.

A Reuters corporate poll last week showed that the majority of Japanese companies were concerned that a slowdown in China, Japan’s largest trading partner, could affect their business. Continue reading

The slowdown is being felt across most of China’s economy, from retail to the factory sector, which saw its weakest production growth since the pandemic began.

China’s auto sales plummeted 19.6% yoy in September, industry data showed last week, and fell for the fifth straight month amid ongoing global semiconductor shortages and the power crisis.

There is also a risk of sharp declines in new construction starts on the Chinese real estate market due to regulatory enforcement as a risk for commodity exporters such as Australia. Continue reading

Iron ore prices have nearly halved since hitting a record in mid-May, with demand hurt by China’s steel cutbacks and real estate slowdown. Continue reading

Last week, mining giant Rio Tinto (RIO.L) lowered its forecast for iron ore deliveries for 2021, mainly due to tight labor market conditions in Australia, but also warned of headwinds from China’s regulatory action. Continue reading

‘STAGFLATION’

Despite the risks from China, analysts will say Asia will be able to prevent a steep slump in domestic demand as improved vaccination rates allow countries in the region to shake off COVID-19 restrictions.

Likewise, Chinese demand for some goods such as fuel and food remains stable. This means that for the time being central banks are unlikely to deviate from their general departure from the monetary framework of the crisis period.

Singapore tightened its monetary policy last week. Continue reading

In addition to the broader demand shock, economies in Asia and elsewhere could worsen as supply-side problems in China, such as power shortages, worsen.

So far, China’s manufacturers and exporters have had to pass on the higher costs caused by supply bottlenecks from coal to semiconductors.

However, analysts warn that the inflation situation is fluid.

While weaker demand could ease price pressures, if left unchecked, supply chain bottlenecks could create a “stagflation” nightmare in which rising prices are accompanied by stagnant growth.

“I think it could potentially be a double blow now. With China being one of the economic engines for the region, any slowdown could hurt demand for regional goods and services,” said Selena Ling, director of treasury research and strategy at OCBC -Bank.

“Second, given the ongoing power crisis, policymakers will in all likelihood prioritize winter demand over industrial activity.

Additional coverage by Tetsushi Kajimoto, Kantaro Komiya and Leika Kihara in Tokyo; Orathai-Sriring in Bangkok; and Tom Westbrook in Singapore; Writing by Sam Holmes; Editing by Raju Gopalakrishnan

Our standards: The Thomson Reuters Trust Principles.


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