Interesting Times in Asia

Interesting Times in Asia

by Carl Tannenbaum, Asha Bangalore, Ankit Mital, Northern Trust


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Editor’s note: You can now follow our musings on  Twitter @NT_CTannenbaum.

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“May you live in interesting times” is a traditional Chinese curse disguised as a blessing. Looking at emerging Asia today, it can certainly be said that it is both cursed and blessed.

The potential curses come in several forms. A Chinese slowdown and the threat from North Korea are proximate concerns. A bit further away geographically, but no less important economically, is the fear of a more protectionist America and a stronger U.S. dollar.

We have expressed our concerns over the current state of economic affairs in China a number of times, most recently last week. A Chinese “hard landing” (a financial crisis accompanied by a deep economic slump), would have a chilling effect on the economies of southeast Asia. But even if Chinese policymakers are able to engineer an orderly slowdown (trading off higher growth for more sustainable growth), a contraction in demand for imports, a fall in investment spending and a sharp correction in commodity prices would ensue.

Those developments would be especially damaging for China’s regional neighbors. Even though the Association of Southeast Asian Nations (ASEAN) countries have worked to diversify both their output and their trading relationships, they are still linked closely to the area’s economic heavyweight. It wasn’t surprising that Moody’s downgraded Hong Kong’s credit rating last week shortly after taking similar action on China.

China is an important export destination for Korea, Taiwan, Thailand, Malaysia and others. With China accounting for anywhere from 10% to 25% of exports from these countries, the impact from any prolonged slowdown would be painful. For commodity exporters Indonesia and Malaysia, the negative terms-of-trade shock from low commodity prices would perhaps be even more significant than the direct exposure of these countries’ economies to Chinese demand. Singapore and Hong Kong, the premier service and trading hubs in the region, would suffer from a general slowdown in economic activity.

Significant economic surpluses accumulated over more than three decades have allowed China to be generous with its financial resources. Almost all southeast Asian countries have attracted substantial private Chinese foreign direct investment, but even developing countries in western Asia, such as Pakistan, Sri Lanka and Nepal, have benefited from strategic infrastructure investment and funding from Beijing. More may on the horizon if the ambitious “One Belt, One Road” project comes to fruition.

This largess is unlikely to survive a Chinese economic slowdown. China has also been dealing with capital outflows over the past several years; while recent controls have slowed the flood to a trickle, a renewed exodus would serve to limit the Chinese consumption and investment that its regional partners rely upon.

Chinese political capital will be needed to check North Korea. If the worst fears in Korea are ever realized, the humanitarian cost would be catastrophic and dwarf any economic worries that we might have. The hope right now is that the new administration of Moon Jae-in in Seoul, along with its international partners, will be able to deescalate the situation with Pyongyang.

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