On December 7 China announced that it would relax further of its Covid-19 restrictions. The news was well received by the once-booming economies of East Asia. In recent days, many have reported horrific trade data suggesting the domestic impact of China’s zero-Covid policy has bounced across the region. A reopening, however cautious, can only help. But the reasons the tigers fear go far beyond the suffering of their large neighbor. As the world spends less on expensive equipment, the world’s busiest manufacturing center is going to the wall.
China is certainly a major contributor to the sharp slowdown across the region. Asia’s largest economy is suffering from many months of destructive measures to combat the pandemic and a home-grown housing crisis. Data released on December 7 showed Chinese exports fell 9% year on year in November, a much sharper fall than analysts had expected.
As Asia’s growth engine sputters, so does trade between countries in the region. Exports from trade-heavy South Korea, which fell 14% overall in November from a year earlier, were particularly hampered by slumping sales to China, which shrank 26% – the biggest 12-month drop since 2009. Taiwan’s sales to the mainland and Hong Kong fell 21% over the period. There may be more bad news to come. Declining intra-Asian trade, which consists largely of intermediate goods, likely signals a sharper drop in future sales of finished goods.
The China drag could ease sometime next year — but slowly at best. The world’s second largest economy could take many months to recover and large outbreaks of Covid-19 if rules are relaxed could cause short-term disruption.
Meanwhile, a second, lesser-known factor is likely to continue holding back East Asia’s trading giants: the storm the global electronics industry is facing. Worldwide sale of personal computers fell 20% in the third quarter of the year compared to the same period in 2021. That slows down Chinese exports of data processing machines and parts – the category that includes personal computers. These fell by 28% in November compared to the previous year.
The postponement is also bad news for South Korea, the dominant maker of memory chips used in computers worldwide. Its goods exports to Japan fell 18% year-on-year in November. It’s affecting even more distant hubs like Singapore, whose electronics exports fell 9.3% in October. The consulting firm Oxford Economics expects a further slump in goods exports from the region of around 4% for the coming year.
Rapid rate hikes in America, which other central banks are having to follow suit, are fueling the slowdown by curbing household and corporate demand for consumer goods. This effect is reflected in orders for machine tools from Japan, a leitmotiv for industrial activities worldwide. They fell 5.5% year-on-year in October. The hardest hit were orders for electrical and precision machinery, which fell 27% over the period.
The pressure on Asian industry is in stark contrast to the post-financial crisis years, when low interest rates and a booming Chinese economy have been a boon to the region’s industrial networks. Natixis, an investment bank, expects semiconductor demand to remain subdued until at least next summer; Rate setters at the Federal Reserve and China’s public health chiefs could remain cautious for longer. East Asia’s starving tigers could face many more lean months. ■
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