China's Slowdown Forces the Rest of Asia to Rethink

(Bloomberg Opinion) -- Remember when proximity to China was an unalloyed positive?

That worked great when China was in an upswing or chugging along; it’s not so great now that China is cooling. Across Asia, the slowdown is forcing export-dependent economies to lean more on domestic motors and contemplate juicing growth through either monetary or fiscal easing.

China's gross domestic product numbers released Monday showed a gain of 6.4 percent last quarter from a year ago, a smidge less than 6.5 percent in the July to September period. The quarterly accounts obscure readings on manufacturing, car sales, exports and imports published since January that show a dip.

While still relatively upbeat on Asia Pacific, the World Bank's Global Economic Prospects report portrayed a region dinged by less demand for its exports. Not just from the U.S., but also China. When your massive neighbor sneezes, you should check when you had your last flu shot. That is true regardless of your neighborhood.

It's revealing that the World Bank says “deep regional and global integration” makes Asia “vulnerable to external shocks.” For a long time the model economy was exactly that: one that was open and integrated with the rest of the world. This was seen as strength, not weakness. How many times over the years did we hear multilateral lenders and their milieu tout the benefits of fusing a nation's commercial life with that of others?

China off the boil is one of several related forces likely to drive interest rates in Asia this year. Gauges of manufacturing have waned and weaker activity in the world’s second-biggest economy is dissipating any inflationary pressure that might have existed – and that isn't saying much. Together with the prospect of a prolonged pause from the Federal Reserve, you can forget about any monetary tightening this year. Easing may instead be on the menu.

China’s stumbling exports have coincided with what Bank of America Merrill Lynch describes as a marked slowdown of such gauges in Northeast Asia and the largest Southeast Asian economies. South Korea’s industrial production has been hit particularly hard, the firm wrote last week.

It's difficult to see how persistent trade tensions between the U.S. and China, especially on technology issues, help this situation. Even if a tactical deal is struck between Washington and Beijing, ties won't return to where they were before the ascendancy of Presidents Donald Trump and Xi Jinping.

This all looks as much structural as it is cyclical. The broader point is that China has steadily slowed since the global financial crisis, regardless of the not-too-terrible data Monday. The kind of scorching numbers clocked through most of the aughts – growth ballooned to about 15 percent in 2007 – are gone. Large and mature economies can't keep doing that or anything remotely like it.

In the decades to come, China's growth rate will resemble that of the U.S. today: around 2 percent, give or take, according to an OECD projection. What will happen to those globally integrated economies clustered around China? They will need another patron.

Export dependence and openness works when things are going great and the sky seems the limit for your neighbor. When China comes down to earth, the rest of Asia may need not just a new patron, but perhaps a new model.

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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