Don’t count on China’s interest-rate cut last week producing a growth rebound. The air is already hissing out of China’s credit, housing and investment bubbles. Electricity production in the year to May fell by 2% and fixed asset investment growth, year-on-year, was the slowest since 2001 in the first five months of 2012. These are the latest signs of a sharp slowdown that have fuelled fears of a hard landing.
So which Asian countries are most vulnerable? Capital Economics says the countries that would suffer most from lower demand for their exports would be, in descending order, Singapore, Taiwan, Korea, Malaysia and Vietnam.
In Singapore and Taiwan, exports to China comprise 22% and 20% of GDP respectively. For the other three the figures are around 10%-13%. As investment falls in China, demand for commodities will slide too, battering raw material prices. Major commodity producers Australia and Indonesia, whose exports to China make up 5% and 3% of GDP respectively, “would be especially exposed”.
But Hong Kong would suffer most from a hard landing. It is inextricably linked to China and, unlike other Asian countries, it can’t cut interest rates to bolster local demand: its currency peg with the dollar means that it must follow US monetary policy.
Assuming several quarters of sub-7% GDP growth in China, Hong Kong would fall into a deep recession and the other states mentioned above could see 2% or so wiped off their growth rates, reckons Capital Economics. India would barely be affected, however. It is a “large, domestically orientated economy with limited exposure to China”.