Countries in the rest of Asia must prepare for the economic impact of China’s great rebalancing away from a heavy reliance on industry to a more consumer and services driven economy, leading experts said today at the Asian Development Bank annual meeting in Frankfurt.
“The most overlooked issue is the fact that China cannot rebalance unilaterally,” said Paul Gruenwald, managing director and chief economist, Asia-Pacific, at Standard & Poor’s.
China’s trade patterns will change greatly as imports of consumer goods are likely to grow and the country begins reducing its imports of industrial goods, commodities and investment. “That needs to be mirrored by China’s trading partners,” Gruenwald said.
A host of challenges will have to be met by those trading partners, especially net exporters, whose terms of trade will deteriorate and currencies weaken.
Adapting to that will require flexible labour forces and capital markets, governments responsive enough to help steer the resources toward the development of new opportunities with China and flexible financial institutions that can lend to businesses operating in sectors that will be new to certain regions, Gruenwald said.
Among those that are developed and prepared enough to make the change are Australia, which is transitioning into a commodity exporter to China, and Korea, which could act as a good supply chain intermediary with China, Gruenwald said.
IMPACT ON EUROPE
Mitsuhiro Furusawa, deputy managing director at the International Monetary Fund, added to that list low wage, low income Asian countries such as Bangladesh, Myanmar, Cambodia and Vietnam, which stand to benefit from China’s exit from the labour-intensive export sector.
But some Asian countries may be significantly more vulnerable to fluctuations in their trade relationships with China. The success or failure of those countries to manage their economic links to China will have a magnifying effect on global economic performance.
But for those individual economies, a slowdown in China or a change in trade conditions could be meaningful. “It’s hard to do a rebalancing ex-post,” S&P’s Gruenwald said.
“China’s a huge trading partner for a lot of these countries,” he added, noting Indonesia as an economy that could go either way. The election of president Joko Widodo in 2014, who has made reforms friendly to domestic growth, has benefitted the country greatly, but its status as a heavy exporter of commodities including coal to China could negate those benefits.
Indonesia “is a big domestic story, but on the external side, we’ll have to watch those three or four factors. And they’re going to be enough to move the needle,” said Gruenwald.
European countries will also be affected such as Germany, whose car manufacturers have experienced a boom in China in recent years.
Europe’s strengthening economic link to China is manageable, said Yves Mersch, member of the executive board of the European Central Bank. The percentage of Europe’s trade with China is large, but not worrisome, he said, and only 1% of European banks have loans or debt outstanding to China.