China’s been an engine of regional growth for the past three decades, but its mounting economic woes have cast a shadow over its neighbors. As China’s top leaders get serious about reviving the economy, Beijing’s next policy steps could determine if it will again be a regional tailwind.
For regional economies, it’s not about whether China manages to hit its growth target but whether it stabilizes or veers toward a further slowdown, analysts say.
“The type of China stimulus matters,” Nomura analysts said in a note.
Rather than splashy stimulus that delivers a “sugar hit” to get to 5% annual growth, what the rest of Asia really wants is support that targets structural challenges in China’s economy, said Harry Murphy Cruise, economist at Moody’s Analytics.
China’s policy blitz is viewed as a positive step, particularly as officials have made the right noises about sagging domestic demand and long-brewing problems like youth unemployment. Saturday’s finance ministry meeting stoked hopes for more fiscal stimulus but a lack of details continues to feed doubt about what Chinese recovery efforts mean for the region.
“The package fell short of bold policies to prop up consumption, the property and private sectors,” CreditSights analysts Zerlina Zeng and Karen Wu said in a note.
Asia’s wish list includes: striking a better balance of budget responsibilities between local and central governments, putting a floor under property prices, and ensuring households have the confidence to spend, Cruise said.
That sort of demand-side stimulus can ensure China will continue to keep buying from the region, and lower risks of something knocking China’s economy off course, such as tariffs or a global shock, he added.
But it’s not just trade that affects the rest of Asia.
“China is the major source of tourism for most of APAC. If we’re seeing households lose confidence…well, then they’re going to travel less. They’re going to spend less,” said Cruise.
Sluggish demand at home prompts Chinese manufacturers to sell abroad, bringing unwelcome competition to the region.
Chinese firms’ efforts to sell excess inventories at thin margins overseas have posed intense competition for Southeast Asian manufacturers on their home turfs, said Erica Tay, an economist at Maybank Investment Banking Group. Manufacturers in Thailand have complained about the influx of cheaper Chinese imports, she said.
But trade flows both ways and Nomura says Asia’s exports to China are influenced by its property construction investment and retail consumption.
Asia may reap fewer benefits if Beijing ramps up infrastructure projects but fiscal stimulus for the property sector, such as direct funding for pre-sold and delayed residential projects that sparks investment, could broaden Asia’s exports recovery and lift commodity prices, Nomura said.
Another way China’s policy wins and misses are felt in Asia are via financial markets. Wild swings in equities over the past weeks tied to policy announcements show how high-strung markets are, and how easily sentiment can spill over across geographies.
A downturn in financial markets could permeate pretty quickly, “and that hurts most places, very quickly, particularly Hong Kong, Taiwan and Singapore,” Cruise said.
While it’s clear China’s policymaking has consequences beyond its borders, regional players can and have managed to cushion the impact of its slowdown.
Regional growth is at or near prepandemic levels and inflation has been largely wrestled into submission.
Countries like Indonesia, Malaysia, the Philippines and Singapore have confounded expectations and posted stellar economic growth, despite a slowing China, Maybank’s Tay said.
Robust domestic demand in Indonesia, and a tech-driven export boom for countries like Singapore and Malaysia, helped blunt the impact of China’s slowdown, she said. An upturn in foreign direct investment in several markets also lent a hand.
Still, the region will welcome forceful fiscal stimulus from Beijing, Tay said.
“We want to see good growth in China’s economy and to get good growth, it’s not about building more. It’s addressing structural concerns,” said Cruise at Moody’s Analytics.
He sees some cause for optimism.
“China has to change. Previously, yes, you could manufacture your way out of trouble…but when the outlook is for an economy facing more tariffs, where geopolitical tensions are rising, you can’t rely on that growth driver anymore” and the domestic economy needs to shore up growth.
Write to Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com, Kimberley Kao at kimberley.kao@wsj.com, Amanda Lee at amanda.lee@wsj.com
