China’s stumble slams brakes on growth in Asia

For years after the 2008 financial crisis, Asia’s rapidly expanding economies propped up global growth, with China clocking a pace of more than 9 percent, pulling along its neighbors.

Now, China’s continuing slowdown is dragging them, too, exposing weaknesses across the region, from Indonesian borrowing needs to record Korean household debt and the bureaucratic and corruption hurdles in the Philippines that hold back its infrastructure projects.

Growth is below forecasts, hurt by exports that are falling in nine of the 12 main Asian economies, according to data compiled by Bloomberg. The slump, which spans India to Malaysia and Korea, is partly a result of China’s deceleration - to a growth estimated at 6.8 percent for last quarter, under the pace to meet the government’s target of about 7 percent for 2015.

Making things worse is that unlike the global slowdown in 2008-9, when Asia was primed to unleash stimulus, this time, the region is saddled with debt. And in some economies, interest rates are already at a record low. While lower oil prices have helped budgets, the impact on spending has been muted so far.

“Asia rode high on the wave of a vast global monetary stimulus in recent years. Now the bill is coming due,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings PLC in Hong Kong.

The slowdown puts Asia on shakier ground to face threats from financial turmoil - including the risk of an exit of Greece from the euro region, interest rate increases by the U.S. Federal Reserve and the volatility in China’s stocks in recent weeks. Higher U.S. borrowing costs could trigger an outflow of capital and raise loan rates.

“The combination of Asia’s declining investment returns and high local debt levels is forcing deleveraging, which should lead to capital exports,” Morgan Stanley’s global currency research team, led by Hans Redeker in London, wrote in a July 9 note. That suggests outflows of funds to the dollar, they wrote.

Across Asia, the story is similar. Shipments from Korea - equivalent to about half the nation’s gross domestic product - have been falling all year, hurt by weak demand in its biggest market, China.

Philippine exports in May fell 17.4 percent from a year before, deeper than the 10 percent drop that economists anticipated in a report on Friday. The International Monetary Fund now sees 6.2 percent growth this year and 6.5 percent in 2016, against 6.7 percent and 6.3 percent previously.

Analysts at JPMorgan Chase & Co. estimate that growth in Asia’s emerging economies, excluding China and India, is on track to record its weakest quarter since the end of 2011. GDP could have expanded by a seasonally adjusted annualized 1.3 percent in the second quarter over the previous three months, the U.S. bank said in a note.

Things may get worse - in the city-state of Singapore, a bellwether given its reliance on commerce and capital flows, chief financial officers are the most pessimistic in the region when it comes to profits this year, according to a survey by Bank of America Merrill Lynch.

“The big picture for these countries is that trend growth is now a lot slower than it was,” said Gareth Leather at Capital Economics Ltd. in London, who has covered Asian economies for almost a decade.

Among the economies most vulnerable to Fed rate increases and subsequent capital flight are Indonesia and Malaysia, where foreign currency borrowing rose, even as their local currencies weakened.

BY BLOOMBERG