Economists expected China’s rebound from strict pandemic controls would be “more sustained and more significant than it turned out to be”, said Aaditya Mattoo, World Bank chief economist for East Asia and the Pacific.
The bank pointed to Chinese retail sales tumbling to below pre-pandemic levels, stagnant house prices, increased household debt and lagging private sector investment.
Mattoo warned slower growth would persist unless governments, including China’s, embarked on “deeper” service sector reforms. But a transition from property and investment-led growth has been challenging for many developing Asian economies.
“In a region which has really thrived through trade and investment in manufacturing ... the next big key to growth will come from reforming the services sectors to harness the digital revolution,” he said.
Softer global demand is taking its toll. Goods exports are down more than 20 per cent in Indonesia and Malaysia, and more than 10 per cent in China and Vietnam compared with the second quarter of 2022. Rising household, corporate and government debt has further dented growth prospects.
The worsening forecasts also reflect that much of the region — not just China — is starting to be hit by new US industrial and trade policies under the Inflation Reduction Act and the Chips and Science Act.
For years, US-China trade tensions and tariffs imposed on Beijing by Washington benefited Southeast Asia, driving demand for imports towards other countries in the region, especially Vietnam.
But the introduction of the IRA and Chips laws in 2022 — policies designed to boost US manufacturing and cut American dependence on China — has hit Southeast Asian countries. Their exports of affected products to the US have fallen.
“This whole region, which had perversely benefited from US-China trade tensions in terms of [trade] diversion, now is suffering trade diversion away from it,” said Mattoo.
Electronics and machinery exports from China and south-east Asian countries including Indonesia, Vietnam, the Philippines, Malaysia and Thailand declined after President Joe Biden’s protectionist policies came into force, according to the World Bank.
By comparison, US trade with countries including Canada and Mexico which, unlike China and Southeast Asia, are exempt from the local content requirements attached to US subsidies, has not declined.
“The treatment under these provisions is discriminating against countries which are not exempt from the local content requirements,” Mattoo said.
The World Bank data factors in a reduction in demand due to the overall slowdown in global growth that is affecting all countries.
Concerned Southeast Asian countries are rushing to fight back. Indonesian business has criticised the “unfair” exclusion of the country’s critical minerals from a huge package of US subsidies for green technology.
Indonesia holds the world’s largest reserves of nickel, which is crucial for producing electric vehicle batteries. Jakarta is trying to negotiate a provision that would make its mineral exports eligible for similar treatment to Canada or Mexico.
Business lobby groups in Vietnam have similarly argued that the US should extend electric vehicle tax credit benefits to Hanoi, especially after the two countries formally upgraded ties this month. The US is Vietnam’s largest market, but shipments fell 19.1 per cent from January to August this year, compared with a 13.6 per cent rise in 2022.
Additional reporting by Andy Ling.
Written by: Edward White and Mercedes Ruehl.
© Financial Times