Asia's Growing China Problem
Asia has a China problem. Beijing has just initiated its biggest cut in bank reserve requirements since 2008, a move that underscores just how worried it is about its economy. But the cut is also a stark wake-up call for neighbors that have gotten used to riding China's boom. For years, China's steady growth served as a welcome antidote to an otherwise gloomy global scene. Now even China is sputtering in ways that should worry officials from Seoul to Jakarta.
The People’s Bank of China betrayed a sense of heightened anxiety this week. Normally, the central bank tweaks the amount of cash lenders must set aside as reserves by 50 basis points, at most. Slashing it by 1 percentage point leaves little doubt that, amid a collapse in the price of commodities like iron ore (down 30 percent this year), China is decelerating faster than President Xi Jinping had expected.
What's more, the contradictory signals coming out of Beijing suggest policy makers are at odds over how to respond. The PBOC's cut -- which will allow banks to add $194 billion of new lending to the economy -- came two days after the China Securities and Regulatory Commission clamped down on margin trading to curb froth in the stock market. Even as Beijing has been warning its 1.3 billion people not to bet too heavily on stocks, it has been loosening rules to allow investors to open as many as 20 trading accounts.
That latter policy should be particularly worrying for anyone hoping the Chinese economy will avoid an outright crash. "When a stock market doubles in six months," quips investor Patrick Chovanec of Silvercrest Asset Management, "you usually take away the punchbowl -- not China."
China's economic policymakers, who are attempting a managed slowdown on an unprecedented scale, probably feel they lack other options. Since 2008, they had relied on huge infrastructure projects and thriving real estate markets to put a floor under weakening growth. But those sectors are now wildly overcapacity. And that has forced Xi and PBOC chief Zhou Xiaochuan to depend almost entirely on inducing a stock market rally.
Whether that's a sustainable strategy is another question, of course. Economic policy that's overly reliant on the stock market, says economist Adam Slater of Oxford Economics, "raises the risk of serious negative feedback effects, for example from bad loans, banking sector problems and a flight of foreign capital."
What's clear is that any economic collapse in China would immediately be felt across the continent. China's $9.2 trillion economy is by far Asia's biggest -- nearly twice the size of Japan's -- and it is the region's main trading partner.
China's downshift is already unmasking Asia's underlying cracks. After a decade of stellar performance the region is expanding no faster than in the early 2000s. "Risks in emerging markets -- half of global GDP -- have in our view clearly increased," says Slater. Now, Slater says, developing-economy growth, excluding China, will be only about 2 percent this year "with risks still to the downside."
Asia needs a growth plan that relies less on China and more on domestic demand. It's hard to craft uniform prescriptions for such a large and diverse region, but, at risk of generalizing, Asia's developing economies should start by lowering trade barriers; reducing red tape; attacking corruption; improving infrastructure; and reducing taxes on regionally-made goods to increase exports and, in turn, wages.
"Asia has had an easy ride for many years, initially enjoying the fruits of reforms implemented much earlier and then seeing its run extended by an extraordinary monetary stimulus," warns HSBC economist Frederic Neumann. "This, however, led to a neglect of further reforms, with easy gains dispelling any sense of urgency to sustain progress with politically painful policy decisions."
It's hard to exaggerate how devastating a Chinese crash would be for Asia. Even an orderly deceleration of China's economy will likely prove a crisis. But perhaps that won't be a bad thing for a region that has long delayed standing on its own.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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