28-11-2023 (SINGAPORE) China’s economic slowdown is raising concerns about the future of the Association of Southeast Asian Nations (ASEAN) bloc, which has long benefited from strong economic ties with its northern neighbor. As China shifts its growth focus from investment to consumption, doubts persist about its ability to rebalance its economy smoothly. The credit-fueled nature of China’s investment drive has led to high levels of debt and raised financial vulnerabilities. While China has managed to avoid a crisis so far, progress on rebalancing has been limited.
China’s GDP has seen little change in its consumption portion over the past 15 years, with investment still accounting for over 40% of economic output. This investment-led growth model is reaching its limits, compounded by rifts with major export partners like the United States and Europe and a shift in domestic priorities towards security over growth. As a result, China’s trend growth outlook is overshadowed by a structural slowdown. While short-term recovery possibilities can be debated, the country’s growth rate has more than halved between 2007 and 2019 and is expected to slow further to 3.5% by the end of the decade.
So, should Southeast Asia be concerned about its economic future?
Trade ties between the region and China have reached new heights, with bilateral goods trade surpassing $500 billion in 2019. However, the relationship has become increasingly unbalanced, with Southeast Asia relying more on Chinese imports and experiencing slower export growth. Except for Indonesia, whose commodity exports have benefited from strong demand in Chinese sectors such as electric vehicles and solar panels, China’s share of total exports from major ASEAN economies has stagnated over the past decade.
One reason for this is China’s declining reliance on imports. With the rapid onshoring of manufacturing, China has become less dependent on other countries, including its Southeast Asian neighbors, to meet domestic demand and operate value chains. While China’s shift towards high-tech manufacturing could potentially increase its imports of consumer goods from ASEAN economies, it remains to be seen.
On a positive note, growing Chinese spending on services, including tourism, presents an opportunity for Southeast Asian countries. Thailand, Malaysia, Singapore, and others have benefited from the influx of Chinese tourists, which has boosted tourism, employment, incomes, and domestic demand. This trend is expected to resume and potentially accelerate as geopolitical developments lead Chinese tourists to avoid previously favored destinations like Japan and the U.S.
The most significant factor mitigating concerns for Southeast Asian economies is their ability to attract supply chains diversifying away from China. This could offset the negative impact of a Chinese slowdown by boosting exports to the rest of the world and generating positive spillovers for the region’s domestic economy.
However, challenges exist. The intensifying tensions between the U.S. and China pose a significant hurdle as Washington seeks to exclude China from certain advanced technologies and create supply chains that do not rely on China. ASEAN economies heavily depend on China for intermediate inputs and foreign direct investment, making them cautious about jeopardizing their relationships with Beijing. Moreover, they face competition from other economies like Mexico and India in attracting relocated supply chains.
Nonetheless, the opportunity to attract supply chains remains open. The U.S. recognizes the dependence of global and regional value chains on China’s pole position in intermediate goods exports. Restructuring supply chains to exclude China will be a complex task, and in the meantime, the U.S. may be open to intermediate solutions that reduce China’s role in critical product supply chains. ASEAN economies can benefit from this by demonstrating a willingness to cooperate, increasing vertical trade integration, and reducing reliance on suppliers outside the region.
Southeast Asia possesses several advantages, including low labor costs, abundant reserves of key raw materials, good education levels, and strong manufacturing capabilities. Western allies have taken notice, with inbound American foreign direct investment into ASEAN economies surpassing that from China in 2021.
China’s slowdown does not signify the end of Southeast Asia’s prosperity. While some economies may feel the impact of China’s slowdown more than others, ASEAN economies can offset the losses by increasing their presence in global value chains. By seizing this opportunity, they can navigate the challenges and continue their path towards economic growth and development.
