Economic trends

US versus China – who matters more in Asia?

China is important, but Asian economies also stand to gain from improved growth prospects in the US

China’s influence over Asia is significant and growing, but amidst the mounting worries over China’s slowdown it is worth remembering that the US economy still holds substantial sway over much of the region.

Concerns over slower trend growth in China, along with the spectre of the Federal Reserve’s ‘tapering’ of quantitative easing, has spooked global financial markets in recent months.

On the positive side, China’s government is sticking close to its strategy of ensuring balanced and sustainable growth, and the US economy is recovering, helped by gains in the housing and labour markets.

Over-emphasising the slowdown in China risks neglecting the mitigating effect of the US recovery

China’s slowdown is likely to result in some moderation in Asia’s near-term growth. But any such short-term sacrifice should benefit both China and the rest of the region in the longer term. And it would be much more palatable than unabated over-investment in China, which may ultimately prove unsustainable and costly for the regional and global economy.

Over-emphasising the slowdown in China risks neglecting the mitigating effect of the US recovery. The US is still the world’s largest economy, and is almost twice the size of China in terms of nominal gross domestic output.

India, the Philippines and Indonesia are more exposed to the US

Given this, it is timely to assess the relative influence of both China and the US on various countries in Asia. Which Asian economies are more exposed to the US and which are more reliant on Chinese demand for growth?

In a recent study, we examined these linkages through overall growth and the channels of trade, tourism and foreign direct investment. We found that Northeast Asia and Singapore are more exposed to China than to the US, while India, the Philippines and Indonesia lie at the other end of the spectrum. (Note that this does not mean India is as exposed to the US as Hong Kong is to China. This is a relative ranking.)

It is vital for Asia that any slowdown in China be moderate and gradual so that economies can adjust

Our study shows that, in the past five years, China’s importance to Asia has grown relative to the US. Over a longer period, though, Asia is more exposed to US headline growth than to China’s.

It is vital for Asia that any slowdown in China be moderate and gradual so that economies can adjust without suffering too much volatility. The trade route underlines this point. Asia is a highly open region. Of the ten economies we examined in the region, six have trade exceeding their total domestic economic output.

Asian economies have increased their exports to China

Trade is a clear channel where China shows its dominance in Asia. This has been particularly true in recent years: all ten countries in our study have increased their exports to China relative to the US since 2005. The increases were the most obvious in Hong Kong, Australia, Taiwan and South Korea.

As of 2012, only the Philippines and India sent more goods to the US than to China; the other eight economies sent more of their exports to China. Back in 2005, only three economies exported more goods to China than to the US.

However, this analysis does not take into account the indirect trade exposure of each economy to the US. A significant portion of the region’s exports are re-exported by China to the US and other Western markets.

Tourism also links Asian economies together and influences regional growth. Tourism accounts for 2 to 8 per cent of GDP for the economies we examined. Given its close proximity, China is the dominant source of international tourists for most of Asia, with the exception of India and the Philippines. Within Asia, Hong Kong, Taiwan and South Korea receive the largest number of Chinese tourists as a share of their total tourist arrivals.

All ten economies have seen a widening gap between the number of Chinese and US tourist arrivals since 2005. And Chinese tourists spend as much as US tourists (on a per-capita basis) in some places.

Asia stands to gain from Chinese rebalancing and US recovery

Foreign direct investment is another important channel through which the US and China influence growth in Asia. With the exception of Hong Kong, where China has made significant investments, the US remains the dominant investor in Asia.

Taking into account our US and China growth forecasts for this year and next, our study concluded that the net growth impact of a slowdown in China and a recovery in the US will be positive for Malaysia, Taiwan, Hong Kong, Singapore and Korea, all else being equal.

The importance of China to the health of the global, and Asian, economies is undeniable. But as long as China’s much-needed rebalancing is moderate and well calibrated, and US growth continues to show a reasonable improvement, Asia will stand to gain in both the short and long term.

 

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