Cynthia Kim and Chen Lin

SINGAPORE/SEOUL – China’s economic woes have weighed on countries around it, from South Korea and Thailand. A sharp factory slowdown, along with trade bottlenecks, in Asia’s second largest economy, has caused a severe shortage of goods as well as a disruption in supply.

China’s third quarter gross domestic product fell, according to data. This was due to power supply problems, supply chain issues, and the property market crisis.

China’s trade partners face new challenges due to the slippage. This is despite what appears to be an uneven global recovery following the pandemic slump.

Frederic Neumann (HSBC co-head, Asian economics Research) wrote that “Yes, there is growth elsewhere, namely in the U.S.A and Europe seems robust.” However, China is the key engine that has driven growth throughout the region. As China sputters away, Asian economies are likely to lose a lot of their power.

HSBC’s analysis found that Asia-Pacific economies, from South Korea and New Zealand to the United States were more closely correlated with changes in China’s growth than to U.S. GDP or European GDP.

The bank’s economists stated that for each percentage point China increased its economic growth, South Korea saw a 0.7 percent increase in trade power, according to their estimates.

The analysis revealed that South Korea was most affected by Chinese growth changes. Next came exporting nations Thailand (and Taiwan).

Citi analysts downgraded the growth forecasts of economies across Asia, such as South Korea and Taiwan.

A Reuters Corporate Survey showed that a majority Japanese businesses were concerned about China slowing down, Japan’s most important trading partner.

This slowdown can be felt in most sectors of China’s economy. From the factory to retail sector, it posted the lowest output growth rate since the outbreak.

China’s September auto sales dropped 19.6% from one year ago, according to industry data. This was despite a long-running global power shortage and a severe shortage of semiconductors.

Exporters of raw material, like Australia, face similar risks from sharp falls in Chinese property construction.

Prices for iron ore have almost halved from a mid-May record, due to a weakening demand and China’s reduction in steel production.

Rio Tinto (NYSE 🙂 last week downgraded its iron ore shipments for 2021, due to Australia’s tight labour market. But it also warns of the potential headwinds from China’s new regulatory crackdown.

“STAGFLATION”

Analysts say that despite the risk from China, Asia will not suffer a sudden collapse of domestic demand. Asia has improved vaccination rates, which allows countries to get rid COVID-19.

Similar to the US, Chinese consumers are still keen on certain goods such as food and fuel. This means that for the moment, central banks won’t revert to their shift away from the crisis-era monetary setting.

Singapore tightened its monetary policy last week.

Other than the wider demand shock, there could be complications for Asia’s economies and other countries due to China’s worsening supply side problems, like the power crisis.

China’s producers and exporters are yet to effectively pass on the higher cost of supply shortages of all commodities, including coal and semiconductors.

Analysts warn that inflation remains fluid.

Even though weaker demand can relieve price pressures, supply chain problems that are not resolved could cause a “stagflation nightmare” in which stagnant growth is accompanied by surging prices.

I think that it might be a double whammy. China is a major economic engine for the region so any slowdown could affect regional demand for goods and services,” Selena Ling from OCBC Bank, Head of Treasury Research and Strategy, said.

“Secondly, given the current power shortage, it is likely that policymakers will prioritize winter demand (home use) over industrial activity. This could lead to disruptions in global supply chains.