A slowing China presents the greatest systemic threat to commodity-exporting nations in Southeast Asia and beyond, senior regional officials have warned.
“China is a far bigger threat to us, even compared to a debt default in the United States,” Indonesia’s finance minister Muhamad Chatib Basri told Emerging Markets. “The impact would be much more direct in terms of declining [earnings from] commodity exports.
Philippines finance secretary Cesar Purisima added his own concerns, saying that while the country would be hit less hard by slowing growth in the People’s Republic, “when a major part of the world economy slows, everyone gets hurt. The more export-oriented countries [across the region] would be more adversely affected.”
For now, China appears to have staved off any fears that its economy will slow sharply. Gross domestic product (GDP) slipped in the seven straight quarters to end-June 2013, but a mini-stimulus package unveiled quietly over the summer, designed to inject more state capital into infrastructure and construction projects, appears to have stopped the rot for now.
Many criticized the decision by Beijing, though the decision heartened countries linked to China’s commodity-driven growth story. But many wonder how China will pull off the trick of shifting its economic model from investment-intensive to consumption-focused without hurting its economy – and many others that have come to depend on it.
Party leaders appear determined to boost a savings rate stuck at around 35% of GDP, a figure described as Michael Pettis, professor of finance at Guanghua School of Management at Beijing’s Peking University, as “surreally low”.
Yet rebalancing the world’s second-largest economy is “easier said than done”, said Paul Sheard, chief global economist at ratings giant Standard & Poor’s. “The biggest challenge is to go from an economy driven by development and investment to one driven by consumption, which requires a different type of economic model.
“A consumption model would involve [China’s] manufacturing sector reacting creatively to the needs of a billion consumers,” he added. “That requires very different policy tools [including] financial deregulation and allowing households access to capital markets. That cannot happen overnight.”
Sheard said China’s rebalancing act was one of three potential systemic threats to the global economic order, along with America’s debt issues and the ongoing eurozone crisis.
Some believe China will manage the transition with room to spare. Jamie Dimon, chairman and chief executive officer of JPMorgan Chase, told Emerging Markets he believed China would avoid a sharp dip in growth, noting that “a lot of the data coming out of the country shows the opposite happening”.
Yet it’s clearly an issue foremost in the minds of many nations inextricably linked to China’s growth story. “A hard landing in China would be driven by a sharp fall in investment growth,” said S&P’s Sheard.
“Those most exposed to that outcome would be leading commodity exporters – Canada, Australia, Brazil, Indonesia, and some nations in Africa and Latin America. And within that group, the hardest hit would be those with less-diversified and less-developed economic structures.”