A recent report released by the ADB on economic integration in Asia finds Asia’s trade growth to have dropped below that of world trade growth. Explaining the factors behind the decline, the report highlights moderate growth in global value-chains and an economic slowdown in China.
Indeed, the centrality of the Chinese economy to regional and global growth prospects is much larger than the ripples created on national stock markets by jitters in Chinese capital market. A 7%-slide in the benchmark Shanghai Composite Index on the first trading day of the New Year put the circuit-breaker on in the Chinese bourses. At the same time, the halt in trading also led to large plunges in other Asian markets. The panic might have been exaggerated given that the Chinese stock market has far less exposure to foreign portfolio investors compared with domestic investors. But deep down, economists and investors would be worried over the prolonging of the effect of a cooling down in the Chinese economy on the region. Some of these concerns resonate in the findings of the ADB report.
The relation between low trade growth in Asia and a decelerating Chinese economy is explained by the enormous significance of China in Asia’s trade. This significance arises from China’s importance both as a source of exports as well as destination for exports from other Asian countries.
China’s high weightage in Asian trade has essentially been driven by its large imports from Asia. These imports are mostly of intermediate and consumer goods. Intermediate goods are utilised in two ways in the mainland. Some of them are re-exported after processing and re-imported for final assembling. Others, imported as more advanced processed items, are straight away put into assembling. The assembled items are exported to final demand markets across the world, including in Asia. Even mature Asian industrial economies like Japan, Taiwan, Korea and Singapore are importing large assembled items from China. This is evident from China having the highest share, of 43.7%, among Asian economies in hi-tech exports. These exports include aircraft, pharmaceuticals and telecom. At the same time, China also has the largest share among all Asian economies in medium and low-technology exports. The point to be noted though is that these items are all assembled and exported out of China after re-working on intermediate imports obtained from other Asian countries. Myanmar, Hong Kong, Taiwan, Korea, Singapore, Malaysia and Thailand are some of the largest sources of processed intermediate imports for China, whereas Laos, Australia and Central Asian countries are major sources of primary intermediates. Lesser industrial capacity expansion in China implies lower processing of intermediates and lesser imports by China from other Asian countries.
Among Asian exporters to China, the plight of primary intermediate exporters is perhaps the worst. A substantial part of these exports are resource and energy-intensive. Countries like Australia, Mongolia, Turkmenistan, Uzbekistan and Papua New Guinea have been rather badly affected by lower Chinese demand for their exports. A country like New Zealand on the other hand, which is a bigger exporter of processed consumption products to China, essentially milk and dairy products, has been relatively less affected since Chinese demand for consumption imports has held steady.
Intra-regional trade has been the biggest contributor of trade growth for Asia. While not as high as in Europe, where around two-third of total trade is within the region, more than 50% of Asian trade is from within the region. A very significant part of this trade is contributed by intermediate products that move back and forth rapidly across borders undergoing various degrees of processing. It is also this trade that has made several Asian economies important players in global value-chains. As the world’s largest assembling centre and by virtue of being based in Asia, China is the most important country in value-chains connecting Asian economies to the rest of the world. A substantive part of the dense intermediate goods trade culminates in China’s assembling hubs from where products are shipped to various markets for final consumption. Lower Chinese assembling of intermediates not only means lower exports and trade for the rest of Asia, but also lesser expansion of global value-chains between Asia and the world.
Thus, slowdown in the Chinese economy and a moderation in growth of global value-chains as mentioned in the beginning are actually connected developments with the former leading to the latter and the latter reinforcing the former. The eventual casualty has been Asian trade, which is experiencing one of its lowest ebbs since the take-off of Asia as an export hub from the middle of the last century.
The ramifications of poor prospects for Asian trade are worrying for investors too since most long-term investment decisions by MNCs are connected to the former. It is not for nothing that the ripple effects of developments in the Chinese economy are becoming vicious over time.
The author is senior research fellow at the Institute of South Asian Studies in the National University of Singapore.
Views are personal