By the regional head of research for South-east Asia at Standard Chartered Bank: though I question the headline bias suggesting a unipolar answer in a multipolar reality.
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US versus China: Which matters more to Asia and S’pore?
China’s growth is flagging, but the US recovery is strengthening. It is timely to assess the relative influence of both on the region’s economies.
By Edward Lee For The Straits Times
Source – Straits Times, published August 29, 2013
CHINA’S influence over Asia today is significant and growing, but it is by no means the only story in the region.
Perhaps due to China’s stellar rise over the last few years, it is easy to overlook the substantial sway the United States economy still holds over much of Asia.
Concerns over slower trend growth in China, along with the spectre of the US Federal Reserve’s “tapering” of quantitative easing, has spooked global financial markets in recent months.
Investors are concerned that China’s slowdown will crimp growth across other Asian countries that sell to China, and that the US reduction of its US$85 billion (S$109 billion) a month bond-buying programme will remove some of the liquidity that has kept markets buoyant.
From another lens, though, China’s government is sticking close to its strategy of ensuring balanced and sustainable growth, and the US economy is recovering, helped by gains in the housing and labour markets.
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China’s slowdown is likely to result in some moderation in Asia’s near-term growth. But any such short-term sacrifice should benefit both China and the rest of the region in the longer term.
Such an outcome would be much more palatable than unabated over-investment in China, which may ultimately prove unsustainable and costly for the regional as well as the global economy.
Also, over-emphasising the slowdown in China’s trend growth risks neglecting the mitigating effect of the US recovery.
The US is still the world’s largest economy and is almost twice the size of China in terms of nominal gross domestic output.
Given this, it is timely to assess the relative influence of both China and the US on various countries in Asia. Which Asian economies are more exposed to the US and which are more reliant on Chinese demand for their growth?
And what will be the net result to Asia of faster growth in the US and slower growth in China?
The trade link
IN A recent study, we examined the linkages between Asia, China and the US through overall growth and the channels of trade, tourism and foreign direct investment.
We found that North-east Asia and Singapore are more exposed to China than to the US, while India, the Philippines and Indonesia lie at the other end of the spectrum. Note that this does not mean India is as exposed to the US as Hong Kong is to China. This is a relative ranking.
Our empirical study shows that although China’s importance to Asia has grown relative to the US in the past five years, over a longer period, Asia is still more exposed to US headline growth than to China’s.
Besides the influence of overall growth, the trade channel is another perspective we can use to weigh the relative exposure of Asian economies to the US and China. Asia is a highly open region. Six have trade exceeding their total domestic economic output.
The 10 regional economies our study looked at were India, the Philippines, Indonesia, Thailand, Malaysia, Australia, South Korea, Singapore, Taiwan and Hong Kong.
Trade is a clear channel where China shows its dominance in Asia. This has been particularly true in recent years – all 10 countries in our study have increased their exports to China relative to the US since 2005.
The increases were the most obvious in Hong Kong, Australia, Taiwan and South Korea.
Back in 2005, only three economies exported more goods to China than to the US. As last year only the Philippines and India sent more goods to the US than to China; the other eight economies sent more of their exports to China.
Even so, the 10 economies in our study exported US$259 billion in goods to the US last year, accounting for almost a tenth of their exports. The US featured as a top-three export destination for seven of those 10 economies.
This analysis, however, does not take into account each economy’s indirect trade exposure to the US.
A significant part of the region’s exports are re-exported by China to the US and other Western markets. It is estimated that 50 per cent of China’s imports are processed and re-exported.
Tourism and investment
TOURISM also links Asian economies together and influences regional growth. This sector accounts for 2 to 8 per cent of gross domestic product (GDP) – a measure of an economy’s total output – for the economies we examined.
Given its close proximity, China is the dominant source of international tourists for most of Asia, with the exception of India and the Philippines.
Within Asia, Hong Kong, Taiwan and South Korea receive the largest number of Chinese tourists as a share of their total tourist arrivals.
All 10 economies have seen a widening gap between the number of Chinese and US tourist arrivals since 2005. And Chinese tourists spend as much as US tourists (on a per capita basis) in some places.
On the other hand, the reverse trend holds true for foreign direct investments into Asia, which is another important channel through which the US and China influence growth in the region.
With the exception of Hong Kong, where China has made significant investments, the US remains the dominant investor in Asia. US direct investment in nine of the economies in our study totalled US$48 billion, compared with US$15 billion invested by China, according to the latest annual data available.
The Singapore story
LIKE economies in North-east Asia, Singapore is relatively more exposed to China than to the US compared with its regional neighbours.
China surpassed the US as a bigger export destination for Singapore back in 2009 and the trend has continued until now.
The share of Singapore’s exports going to China rose to about 10 per cent in 2012, from 8 per cent in 2005, while that going to the US dropped to around 6 per cent, from 11 per cent, over the same period.
In tourism too, China’s contribution to Singapore is growing while that of the US is declining.
The share of Chinese tourists in Singapore rose to 14 per cent last year, from 10 per cent in 2005, while the proportion of US tourists fell to 3 per cent from 4 per cent in that period.
Still, being a very small and open economy, Singapore can adjust relatively swiftly to changing economic trends.
What remains crucial is for any China slowdown to be moderate to allow time for Singapore’s economy to redirect itself towards a potential US revival. Overall, we expect US economic growth to accelerate to 2.7 per cent next year from 1.6 per cent this year, and China’s growth to ease to 7.2 per cent from 7.5 per cent.
Taking into account these forecasts, our study concluded that the net growth impact of a mild slowdown in China and a recovery in the US will be positive for Malaysia, Taiwan, Hong Kong, Singapore and South Korea, all else being equal.
The importance of China to the health of the global, and Asian, economies is undeniable.
But as long as China’s much-needed rebalancing is moderate and well calibrated, and US growth continues to show a reasonable improvement, Asia will stand to gain in both the short and long term.