The economic rise of China over the past four decades has influenced every corner of the globe. Today, China faces severe challenges that threaten a prolonged slowdown and could disrupt political stability within the country. Adrian Ashurst, CEO of WorldBox Intelligence, asks what this could mean for Southeast Asia.
China’s economic transformation over the past four decades has few equals. Since the country began to open up and reform its economy in 1978, GDP growth has averaged over 9% a year, and more than 800 million people have lifted themselves out of poverty, according to the World Bank. The organisation adds that significant improvements in access to health, education, and other services have also been seen.
By 2020, China had become the world’s second-largest economy, accounting for around 18% of global GDP. Back in 1980, that figure stood at just 1.6%. The country became the factory of the world, exporting vast quantities of goods that suppressed inflation in the West but also led to vast job losses as production shifted east. China also sucked in huge quantities of raw materials as it industrialised, supporting living standards from Australia to Zambia.
But nowhere perhaps has China’s economic ascent been more profound than in Southeast Asia. China has been the region’s largest trade partner since 2009, and one of its largest sources of investment. Pre-Covid, China also became a major source of tourism receipts. Tourist receipts accounted for 5.7% of Malaysia’s GDP in 2019, and Chinese tourists accounted for 17.8% of that revenue. Similarly, 11.4% of Thailand’s GDP was generated by tourism, with a whopping 28.1% accounted for by Chinese spending, according to Bloomberg. (1)
Figure 1: China’s share of global GDP (%), 1980-2020
Source: https://www.theglobaleconomy.com/china/gdp_share/
A new era of much slower growth
Clearly, an economic slowdown in China will reverberate across Southeast Asia – and the globe. But just how bad are China’s economic problems? According to a number of analysts, the answer is: about as bad as it gets. The Wall Street Journal, for example, says economists now believe China is entering an era of much slower growth, made worse by unfavourable demographics and a widening divide with the US and its allies, which is jeopardising foreign investment and trade. Rather than just a period of economic weakness, this could be the dimming of a long era, says the newspaper. (2)
It quotes Adam Tooze, a Columbia University history professor who specialises in economic crises, as saying:
“We’re witnessing a gearshift in what has been the most dramatic trajectory in economic history.”
Capital Economics, a London-based research firm, estimates that China’s trend growth has slowed to 3% from 5% in 2019, and will fall to around 2% in 2030. That will have profound implications. For one thing, China won’t surpass the US as the world’s largest economy.
The country’s many problems include a massive overinvestment in infrastructure that has resulted in vast ghost cities, motorways that lead nowhere, and a huge and rising debt burden. But perhaps the most intractable challenge is the declining population. The latest United Nations projections say China will lose nearly 50% of its population by the end of this century. (3)
The shrinking population is already exacerbating existing problems such as an oversupply of property and a loss of competitiveness as wages rise to attract workers from an ever-smaller pool of labour. Meanwhile, an ageing population is placing an increasing burden on young people and the government to support that cohort.
Political stability threatened
Moreover, falling living standards and rising unemployment, particularly among the young, could pose a threat to China’s political stability. Youth unemployment in the country is now so bad that the government has stopped publishing data on the subject.(4) The last figures to be released showed that the jobless rate among 16- to 24-year-olds reached a record high of 21% in June 2023.
A generation of young people have already become so disenchanted that many have embraced the “lying flat” movement. This urges the young to renounce ambitions to build a career, buy a property or even to get married and have children, since it is virtually impossible for large numbers to achieve any of those aims. Clearly, movements like this suggest the Communist Party’s Faustian pact with the Chinese people, in which they tolerate one-party rule indefinitely in return for higher living standards, is breaking down.
Impact on Southeast Asia
A slowing Chinese economy will have negative effects for Southeast Asia in terms of tourism revenues, inward foreign direct investment (FDI) and export sales to China. However, the overall impact could be positive. Southeast Asia has already benefited from fears over China’s long-term threat to the West as the US and other countries have sought to decouple from the Middle Kingdom. That has resulted in a shift in outsourcing capacity from China to countries such as Vietnam. A reassessment of China’s long-term prospects could drive further investment towards Southeast Asia.
Chinese investment in Southeast Asia has also come at a price. A massive influx of Chinese money into Singapore, for example, has contributed to rocketing prices for property sales and rentals, causing resentment among locals. Chinese investment in Cambodia and Laos, meanwhile, has not always proven beneficial to locals.
China’s insatiable appetite for raw materials also drives up prices in general, fuelling inflation in many countries. Rapidly growing Chinese demand, for example, has exerted a huge influence over global oil prices, and ASEAN has been a net oil importer since 2005. While falling prices will affect commodity producers, there will be positive effects for the much larger manufacturing and services sectors. Weakening Chinese demand, for example, should be beneficial in terms of the cost of importing oil, a key variable in the price of a huge range of services and manufactured goods.
There could also be benefits in terms of regional security. As growth slows and the population ages, China is unlikely to be able to afford to maintain its programme of rapidly expanding defence spending, while its interest in and ability to project power in the South China Sea and beyond could also dwindle.
The extent of the economic problems facing China is gradually becoming clear. What is not so obvious is how they will play out. Much slower growth appears inevitable. The only question is whether China can avoid an outright slump, triggered by, for example, a snowballing of the problems facing the property sector. That would have enormous implications for the global economy and geopolitics. In the long run, however, it is possible that a slowdown in China could actually prove beneficial for Southeast Asia as it attracts FDI once intended for China and reaps the benefits of a calmer geopolitical environment.
2 https://www.wsj.com/world/china/china-economy-debt-slowdown-recession-622a3be4
4 https://www.dw.com/en/why-is-china-hiding-its-youth-unemployment-rate/a-66619871
Source: Worldbox
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