ANALYSIS: Asia will feel trade row as growth in China slows further
By Max Sato
TOKYO, NNA – While the latest official data in China point to growing downside risks, economists expect Beijing to pump more cash into the economy.
And with investors betting the U.S. Federal Reserve will cut interest rates this year, central banks in Asia, particularly in China and South Korea, can follow suit without triggering large-scale selling of their currencies.
But economists at BNP Paribas warned in a report Monday that China risks delaying the process of reducing its exposure to bad loans and excess production capacity by adding more liquidity.
“We expect the Chinese economic slowdown to continue until stabilizing in the October-December period, thanks to stimulus measures,” the report said. “However, the cost is the higher risk of making those excesses worse.”
China's industrial output growth in May was the slowest in 17 years, rising 5.0 percent from the same month a year earlier, the weakest reading since the 2.7-percent increase in May 2002, following a 5.4 percent expansion in April that year.
Fixed-asset investment in the January-May period rose 5.6 percent from a year earlier, slowing from 6.1 percent growth in the first four months of 2019. Retail sales in May climbed a real 6.4 percent on year, up from a 5.1-percent rise in April, largely because there were more holidays in May, while sales have been trending down.
“Going forward, the Chinese government is likely to provide more stimulus to the economy, so growth in China is unlikely to slump,” said Mizuho Research Institute senior economist Koji Kobayashi. “We expect a soft-landing.”
But he added that countries in Asia relying on China’s domestic demand for their own economic growth – Taiwan, Hong Kong, Singapore, South Korea and Malaysia – will feel the pain as the U.S.-China trade spat continues, global demand slows further and Chinese growth remains sluggish.
By contrast, India, Indonesia and the Philippines will feel less pain from the Chinese slowdown because those countries have sufficient domestic demand of their own, Kobayashi said.
Key suppliers of parts and machinery to China for the manufacture of goods for the U.S. will also suffer, he said, in a reference to Taiwan, Malaysia and South Korea.
The trade dispute is estimated to reduce Taiwan’s nominal GDP by nearly 0.5 percentage point, while hurting total domestic output in Malaysia and South Korea by about 0.2 percentage point, according to Mizuho Research.
Japanese firms also supply chipmaking machines to China, but the drag from the trade row rumbling through supply-chain networks is estimated to trim less than 0.1 percentage point off GDP, Kobayashi said, as Japan’s economy is less dependent on exports now.
Some analysts say the U.S.-China trade dispute goes beyond the debate over whether a trade deficit is a bad thing, and is therefore expected to last for some time.
“If you mean a U.S.-China trade dispute as a bilateral trade balance issue, it would be manageable, more or less,” said Rintaro Tamaki, president of the Japan Center for International Finance.
“The current situation seems to be more serious than that. Something like ‘one world, two systems,’ a conflict between two economic and political systems,” said Tamaki, a former top Ministry of Finance policymaker on international affairs from 2009 and 2011.
Some economists in Japan say the U.S. does not like to see China challenge its economic dominance and wants to slash China’s growth drivers and reduce other countries’ reliance on China, just as U.S. leaders felt about Japan’s rapid growth in the 1970s and 1980s.
The U.S.-China dispute is disrupting regional and global supply chain networks and it is expected to have a negative impact on global economic growth in the second half of this year, said Tamaki, who was deputy secretary-general of the Organisation for Economic Co-operation and Development from 2011 to 2017.
“This does not, however, justify strong policy measures, both fiscal and monetary ones, to mitigate the negative impacts on growth,” Tamaki said. “Excessive policy reaction may be more dangerous in the long run, as we saw many times in the past.”