US versus China: Who matters more in Asia?
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China's influence over Asia is significant and growing, but it is by no means the only story. Perhaps because of China's stellar rise, it is easy to overlook the substantial sway the US economy still holds over much of the region.
Concerns over slower growth in China, along with the spectre of the US Federal Reserve’s “tapering” of quantitative easing, have spooked global financial markets. 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.
China’s slowdown is likely to moderate Asia’s near-term growth, but any short-term sacrifice should benefit both China and the region in the longer term. That would be much more palatable than unabated over-investment in China, which might ultimately prove unsustainable and costly for the region as well as the global economy.
Overemphasising the slowdown in China’s growth risks neglecting the mitigating effect of the United States. The US is still the world’s largest economy, and is almost twice the size of China in nominal gross domestic output.
It is timely to assess the relative influence of both China and the US on countries in Asia. Which economies are more exposed to the US and which are more reliant on Chinese demand for growth?
Our recent study examined these linkages through overall growth and the channels of trade, tourism and foreign direct investment and found that Northeast Asia and Singapore were more exposed to China than to the US, while India, the Philippines and Indonesia were at the other end of the spectrum. This does not mean India is as exposed to the US as Hong Kong is to mainland China. This is a relative ranking.
In the past five years, China’s importance to Asia has grown relative to the US. Over a longer period, 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 10 economies we examined, six have trade exceeding their domestic output.
Trade is a clear channel where mainland China shows its dominance in Asia. This has been particularly true in recent years. All 10 economies have increased their exports to mainland China relative to the US since 2005. This was most obvious in Hong Kong, Australia, Taiwan and South Korea.
As of last year, only the Philippines and India sent more goods to the US than to mainland China. The other eight sent more to the People’s Republic. Back in 2005, only three exported more to mainland 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 and influences regional growth. Tourism accounts for 2-8 per cent of gross domestic product for the economies we examined. Given its close proximity, mainland 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 most mainland Chinese tourists as a share of their total arrivals. All 10 economies have seen a widening gap between the number of Chinese and of US tourists since 2005. And Chinese tourists spend as much as US tourists on a per-capita basis in some places.
Foreign direct investment is another important channel through which the US and China influence growth in Asia. With the exception of Hong Kong, where the mainland has made significant investments, the US remains the dominant investor in Asia.
We expect US GDP growth to accelerate to 2.7 per cent next year from 1.6 per cent this year, and China’s growth to ease to 7.2 per cent from 7.5 per cent. Taking into account these forecasts, our study concluded that the net growth impact of a mild slowdown in mainland China and a recovery in the US will be positive for Malaysia, Taiwan, Hong Kong, Singapore and South 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 terms.
Edward Lee is head of research for Southeast Asia at Standard Chartered Bank.
