China’s economic slowdown reverberates across Asia

A manufacturing slump in South Korea has extended to its longest in nearly half a century. Photo / Getty Images

China’s slowing growth is sparking warnings of contagion in Asia, as waning consumer demand and slower manufacturing hit neighbouring countries with close ties to the world’s second-largest economy.

A manufacturing slump in South Korea has extended to its longest in nearly half a century, while other big exporters in the East Asia area are also being hit by slow demand.

South Korea, Asia’s fourth-biggest economy, is viewed as a bellwether for the region’s technology supply chain, which has helped underpin global growth for decades.

The country’s exports fell in July at the steepest pace in more than three years, led by smaller shipments of computer chips to China, while purchasing managers’ indices on Friday showed that factory activity fell in August for the 14th consecutive month, the longest drop in the survey’s history.

Readings in Japan — where activity dropped for the fifth month in a row — and Taiwan also indicated contracting factory output and noted weaker foreign demand.

Concern has intensified in recent weeks after the Chinese economy retreated into deflation, fuelling fears over soft consumption, a weakening currency, a shaky property sector and unsustainable levels of local government debt.

In a sign that slowing global demand is further dragging on the Chinese economy, China’s manufacturing sector contracted for a fifth straight month in August, official data showed on Thursday.

“To borrow an old adage, when China sneezes, Asia catches a cold,” said Vincent Tsui, an analyst with Beijing research group Gavekal. “With Chinese policymakers resisting calls to boost flagging growth through stimulus, the fallout will be felt across the region.”

Tsui cautioned that the trade and finance hubs of Hong Kong and Singapore would be most exposed to a weakening China, given Chinese demand accounts for 13 per cent and 9 per cent of gross domestic product, respectively.

South Korea’s finance ministry has set up a special taskforce to monitor China’s economic situation, and the country has introduced a new national holiday in a bid to try to boost consumption.

“Korea is unlikely to see a recovery any time soon, unless the Chinese economy turns around rapidly,” said Park Chong-hoon, head of research at Standard Chartered in Seoul, also noting challenges stemming from US-China tension and Chinese import substitution.

Australia’s economy has proved resilient during a period of trade tension with China, which had applied tariffs on a number of goods ranging from coal to barley to lobsters, many of which have been unwound in 2023.

However, the country now appears vulnerable to its largest trading partner’s economic malaise, with the Australian dollar dipping to its lowest levels against the US dollar in 10 months as expectations of China’s growth have been scaled back.

The country’s largest companies, including miner BHP, have also started to flag potential concerns about their outlooks if China does not succeed in stimulating growth.

Vietnam, a key exporter of garments and textiles, footwear and wood items, as well as electronics, reported second-quarter exports fell 14 per cent from a year earlier, indicating an industrial production slowdown this year.

Malaysia’s growth rate hit the slowest in nearly two years, data this month showed, as it too confronted the slowdown led by its main trading partner.

Thailand’s economy also grew at a much slower-than-expected pace for the second quarter, hit by domestic political instability and lower levels of tourism from China.

While Asia is facing immediate pressure, Gavekal analysts warned more pain was coming for other regions too.

“As China’s economy weakens, foreign suppliers that grew fat supplying raw materials and machinery face lean times. The cratering of China’s property market will not quickly reverse, and conditions may worsen before they improve,” they said.

Written by: Edward White and Song Jung-a.

Additional reporting by Leo Lewis in Tokyo, Mercedes Ruehl in Singapore, Nic Fildes in Sydney and William Langley in Hong Kong.

© Financial Times