China's woes will hit South-east Asia's economies
Renmnibi devaluation and slowing economy will crimp South-east Asian currencies, tourism and exports
Updated: Sep 7, 2015
South-east Asian economies are coming under pressure from a global stock market sell-off triggered by concern that China's economy may be slowing faster than expected. The People's Bank of China has made efforts to manage the market instability, including devaluing the renminbi by 4% since August 11 and cutting interest rates on August 25. Nonetheless, regional confidence has been shaken.
What next
Reduced demand for imports by China will harm more industrialised ASEAN economies' growth prospects and could lead to further exchange-rate volatility if investors fear a repeat of the 1997 Asian financial crisis. However, a delay in the US Federal Reserve's rate hikes anticipated in September would slow any sell-off of ASEAN financial assets. Any additional renminbi devaluation could lead to a currency war as Asian economies strive to protect their export market share.
Subsidiary Impacts
- External debt repayments could become unsustainable if regional currencies weaken further.
- South-east Asia's tourism industry will suffer as outbound travel becomes more expensive for Chinese.
- Chinese investment in ASEAN will probably slow.
Analysis
Any drop in demand by China, South-east Asia's largest trade partner, has wide implications for ASEAN states.
Exports contraction
Exports to China by Indonesia, Malaysia, the Philippines, Singapore and Thailand fell 12.5% in the first four months of this year against the same period in 2014, according to government figures.
Any prolonged renminbi depreciation could hike the cost of China's resource imports (mostly coming from Indonesia and Malaysia), semi-conductors (coming from all five countries), farm goods (Indonesia, Malaysia, the Philippines and Thailand) and iron and steel products (Indonesia, Malaysia and Thailand).
A study by Malaysian-based RHB Research Institute found that a 1% decline in China's economic growth would see:
- Indonesian export revenues reduce by 13.1%;
- a 4.2% fall in Philippines export income;
- Thailand's export earnings fall by 1.7%; and
- Malaysian and Singaporean export earnings fall 0.3% and 0.6% respectively.
Equities sell-off
Foreign investors are offloading stocks of industries in emerging economies that will lose competitiveness if the renminbi weakens. These sell-offs will accelerate if the Chinese currency weakens further.
Worst affected, so far, are Indonesia, whose benchmark index was down 25% on its April peak at one point on August 24, and Malaysia, whose market touched a 40-month low.
The sell-off keeps pressure on Indonesia's rupiah, which has fallen 12% this year, and the Malaysian ringgit, down 17%. Thailand's baht has lost 8% of its value, the Vietnamese dong 5% and the Philippine peso 4.4% (see SOUTH-EAST ASIA: Fed hike will hit liquidity and debt - August 17, 2015).
South-east Asian currencies face renewed pressure from Chinese stock market volatility
On August 19, Vietnam's central bank devalued the dong for the third time in 2015, to 21,890 per dollar, and widened the exchange rate band to plus/minus 3% to support exports.
Vietnam is less constrained in letting its currency bear the brunt of the adjustment than other regional countries as it has relatively limited exposure to foreign currency debt, much of which is concessional:
- Malaysia. Government intervention has drained foreign exchange reserves by 19% since January 1, to 94.5 billion dollars in mid-August, according to the central bank. Already facing reduced revenues after the oil price drop, Malaysia cannot afford a currency war with China.
- Indonesia. The central bank has said it will try to control the rupiah's depreciation, despite the risk of higher inflation if the currency strengthens. International reserves had fallen by 6.9% to the end of July.
- Thailand. The baht has fallen to 2009 levels amid fears that growth could stall following bomb attacks in Bangkok (see THAILAND: Bombings expose multiple security threats - August 19, 2015). It will be allowed to weaken further, with interest rates possibly being cut to support growth, even at the risk of triggering higher outflows.
Tourism slump
The Centre for Aviation reported in June that Chinese arrivals fell in all ASEAN states other than Thailand and Cambodia in 2014, due to diplomatic strains over the South China Sea, political strife in several ASEAN countries and the loss of two Malaysia Airlines flights.
Excluding Thailand, the region's share of Asian mainland Chinese travellers fell to 22% in the first three months of 2015, from 36% in the same period in 2014, the CFA found. North-east Asian countries such as South Korea were favoured instead, taking 49% of visitors.
Chinese travellers face rising costs
China's currency devaluation will make outbound travel more costly for Chinese, further constraining Chinese tourism to South-east Asia:
Thailand
Accounting for 29% of all Asian travel by Chinese in the first three months of 2015, Thailand will be less attractive following the Bangkok bombing. About 20% of Thailand's tourists are from China. The tourism sector as a whole contributed 36 billion dollars to GDP in 2014.
Singapore
Popular for shopping and gambling, Singapore earned 16.82 billion dollars from tourism in 2014, with Chinese contributing 1.87 billion dollars, according to the tourism board. Apart from cutting Chinese revenues, the weaker renminbi may also have an indirect effect on income from Malaysia and Indonesia.
Malaysia
Chinese tourist arrivals dropped 27.1% in the first quarter, prompting Malaysia to relax visa conditions for Chinese visitors, waiving fees and improving online application options. On August 27, Malaysia said that from October 1 it would waive visa requirements for organised Chinese tour groups.
The renminbi devaluation constrains Kuala Lumpur's effort to expand Malaysia's tourism industry, a key plank of Kuala Lumpur's plan to cover revenue losses from oil exports (see MALAYSIA: Budget failure could see leadership change - January 21, 2015).
Vietnam
With 950,786 Chinese arrivals in the first seven months of 2015, China was Vietnam's largest inbound tourism market, according to government data, a 75.6% increase on the same period in 2014. This growth is now under threat.
Renminbi zone test
The August 13 renminbi devaluation put renewed focus on China's ambition to transform the renminbi into a global reserve currency as it unveils its vision for its 'One Belt, One Road' development programme that would incorporate the Silk Road Fund of 40 billion dollars.
Investments in ASEAN under One Belt, One Road and bilateral programmes will probably face delays as the devaluation makes capital outflows more costly for Chinese corporations. However, there will likely be little impact on Beijing's long-term development goals, partly as they have political motivations.
Projects will typically be financed in renminbi and originate from state-owned banks, which are expanding their presence e in the region. In mid-August, the Bank of China said its Hong Kong unit would fund a large-scale trading push into South-east Asia.
China has invested 123.1 billion dollars in South-east Asia since 2005, according to the American Enterprise Institute, with most going to Indonesia (31.6 billion dollars). Malaysia (21.3 billion dollars) and Vietnam (18.3 billion dollars). Funds were mainly used to secure industrial materials or to cement China's infrastructure role:
Energy
Oil, gas, coal and hydropower have attracted 64.5 billion dollars including 2015 commitments, with the bulk invested in Indonesia, Laos, Malaysia and Vietnam.
Metals
China invested 18.9 billion dollars in the production of minerals used for industrial applications, mostly in Indonesia, Malaysia, Myanmar, the Philippines and Vietnam.
Transport
Road and rail projects accounted for most of the 14.3 billion dollars China has invested in transport. Indonesia, Malaysia, Singapore and Vietnam were the main recipients.
_350.jpg "10 Yuan notes, Beijing (Reuters/Jason Lee)")