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South East Asian trade smashed by trade tensions and a faltering Chinese economy

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Nations in South East Asia are experiencing plunging trade and stumbling economies, analysts say, and they add it is due to a weakening Chinese economy and trade war tensions.

GDP growth across Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam has generally fallen between 2018 to 2019. Analyst Oxford Economics has lowered its regional growth forecast to 4.8 percent in its Research Briefing (Asia) “South East Asia suffers trade tension fallout.”

There are two main drivers of the slump. The first is a weakening Chinese economy that appears resistant to stimulus. Secondly, and more topically, U.S.-China trade tensions are adversely affecting export growth across South East Asia.

“It’s only getting worse”

First, the slowdown in China’s economy. This has been going on for some time, Prasenjit K. Basu, chief economist at equities analyst CrossASEAN Research explains. Basu publishes via the Smartkarma platform. Basu argues that China’s weak domestic demand is dragging Asia into recession.

“It is only getting worse. China’s imports contracted 8.5% YoY [year-on-year] in May 2019 (the steepest decline in 3 years), and total vehicle sales contracted by 16.4% YoY in May (the worst-ever decline)… China’s domestic demand ran out of steam, and industrial output consequently grew just 5% YoY in May, the slowest in 17 years… Stimulus is becoming steadily less effective in China.

“The main impact of the slump in China’s domestic demand is being felt across the rest of Asia, particularly in Korea, Singapore, Taiwan and Indonesia – who have all experienced 7 consecutive months of YoY export contraction. Export performance has been only marginally better in Thailand, Malaysia and the Philippines,” Basu says.

Plunging regional merchandise exports

Analysts at Oxford Economics explain that regional merchandise exports (i.e. the export of physical goods) in US dollars from across South East Asia have “plunged” with a 2.3 percent year-on-year decline in April. A general decline in exports across most South East Asian countries has taken place from about the beginning of 2018, the consultants say. More recently, merchandise exports from across South East Asia have declined since before the beginning of 2019, although merchandise exports from Vietnam are an exception.

Oxford Economics notes that Singapore, Malaysia and Thailand are the South East Asian countries that are most exposed to slower global trade owing to a high share of gross exports to gross domestic product.

Singapore has a particularly strong stake in healthy world trade. Unlike the other countries in the region, as it has a particularly large trans-shipment trade with a container throughput of 36.6 million twenty foot-equivalent units (TEU) in 2018, according to the Hong Kong Marine Department. Also, unlike the other countries in South East Asia, Singapore has a comparatively tiny hinterland, economy and domestic population to act as a buffer when the trade winds blow less vigorously.

Singapore, Malaysia and Vietnam at particular risk

The consultants at Oxford Economic also point out that Singapore, Malaysia and Vietnam are particularly at risk of a slowdown in China as about half of their exports to China are for the purpose of meeting domestic Chinese demand.

It’s a view that Basu of CrossASEAN Research shares. He points out that China has attempted to boost its economy by allowing its banks to hold lower cash reserves. For the technically-minded, what China did was to cut its banks’ required reserve ratios by 350 basis points over 14 months. That should, in theory, make more funds available for business investment. But that stimulus hasn’t worked, apparently. And that’s bad news for South East Asia and some of the other Asian countries too.

China unable to provide extra stimulus

“With China unable to provide additional monetary stimulus to the economy, domestic demand is likely to remain weak, causing a trend contraction in China’s imports. This will continue to exert negative pressure on Asia’s trade-dependent economies,” Basu says. He points to several East Asian countries that will be near recession. These include Singapore, “likely to be stagnant in the year to September 2019,” along with Taiwan, Indonesia, Thailand and the Philippines “all witnessing a steady deceleration in economic activity”.

Basu adds that, for six of the past seven years, global gross domestic product has not grown faster than global trade where, previously, Basu says, it grew by one-and-a-half times global trade.

“The sluggishness is set to persist in 2019 and 2020,” Basu says.

Tit-for-tat tariffs

As is now well reported, there has been a tit-for-tat round of tariffs on trade between the U.S. and Asia. Indeed, it could possibly get worse if the trade tensions get more tense and the U.S. extends its tariffs to all Chinese-origin imports to the U.S. and if China retaliates.

But that’s not all.

“On top of higher tariffs, both countries now have plans to impose export controls that restrict domestic companies from selling to foreign companies on government-maintained ‘entity lists’,” the analysts at Oxford Economics say.

“Further escalation in trade conflicts will certainly undermine growth in the US and Chinese economies, and South East Asia countries more generally,” Oxford Economics says.

South East Asian nations, particularly Singapore and Malaysia, are at risk, Oxford Economics suggests, because they have large volumes of China-bound intermediate goods that are then processed into goods which China exports.

“Given their exposures, we expect Singapore followed by Malaysia to experience a more marked slowdown in exports this year and next,” Oxford Economics says.

Supply chain shenanigans

Trade diversion from China to other nations because of President Trump’s tariffs has not yet massively kicked in. It takes time to set up new supply chains.

Respondents to a recent American Chamber of Commerce in China survey indicated that shifting production and supply chains was on their mind in response to the imposition of tariffs. About 35 percent of respondents said they were considering localising manufacture for the Chinese market in China. Another 25.2 percent said they would adjust their supply chain to source/assemble from outside the U.S. and 22.7 percent said they would do the same outside of China.

Some famous names have announced their intention to relocate.

Equity analysts at LightStream Research, which also publishes via the Smartkarma platform, report that “several individuals” related to the supply chain of gaming console maker Nintendo have revealed that the company wants to move some production to South East Asia. And that’s because of trade tensions.

Other examples include camera maker GoPro, which said it will shift production of U.S. destination cameras from China to avoid President Trump’s tariffs. Japanese electronics maker Sharp is also reported in the general press to be moving some of its laptop production from China to Vietnam. Yet another example is the world’s largest truck-trailer manufacturer, CIMC Vehicles of China, which said in its IPO filing documents that it intends to build new manufacturing and assembly facilities, admittedly not in South East Asia, but in the U.S. to avoid or mitigate President Trump’s tariffs on the imports of Chinese goods.

Trade diversion is also thought to be the reason why Vietnam has been increasing the U.S. dollar value of its goods exports while those of its regional neighbours are falling.