The Impact of Subdued Import Demand from China on Asia

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Despite robust headline economic growth in China and a strong rebound in Japanese domestic demand, export growth decelerated across most of the East Asia region in the first half of 2005. Global demand, especially in the IT related industries, has weakened, while Asian currencies such as that of South Korea and Taiwan have seen notable appreciation in the last year. However, the deceleration in Asian exports is mainly due to the slowdown in import demand from China, although the value of Chinese exports continued to grow by around 30 per cent in the first half of 2005. Year-on-year growth in Chinese import volumes fell from 30.1 per cent in the last quarter of 2003 to 0.2 per cent in the first quarter of 2005, causing export volume growth in Taiwan, South Korea and Hong Kong to fall to its lowest level in 3 years.

Government administered curbs on domestic investment growth since the middle of 2004 coupled with overcapacity in many industries has reduced China's import demand, especially of capital goods and primary goods such as raw materials. We do not expect the Chinese authorities to loosen their rein on investment, as the risk of overheating remains. Overall economic growth has hardly slowed from the 9.5 per cent posted in 2004, while real estate market activities in major cities are becoming more speculative. At the same time the oversupply situation in various parts of the manufacturing sector is unlikely to be resolved speedily and effectively given the state's priority in preserving jobs. Import growth in China is likely to remain subdued, due to import substitution and excess capacity in many sectors. Furthermore, China's import demand for energy products is also expected to slow as the government moves towards relaxing price controls on oil so that domestic oil prices rise towards world prices. Nonetheless, we do not expect a major fall off in Chinese imports, as Chinese exports, which have a high import content, are still experiencing robust growth.

Although we expect world trade growth to slow from over 9 per cent in 2004 to around 6 per cent this year, the Chinese export sector is likely to remain resilient as it continues to attract foreign investment. Japan, which exports mainly machinery and equipments to China, is likely to take the bulk of the burden in China's inventory adjustment, while the newly industrialised Asian economies, which export processing goods to China, will be only mildly affected. Nonetheless, we expect some softening in East Asian growth in the next 2 years from the robust expansion in 2004.

We expect headline economic growth in China to remain robust at 9 per cent in 2005, as private consumption and exports continue to be buoyant. So far, the tightening measures on investment have had little effect on consumer spending, as net interest income has risen. Much of the slowdown will be in construction and in import intensive investment. Domestic private consumption in China is much less import intensive than domestic investment. Overall we expect that China's trade surplus will continue to widen in 2005, especially as the removal of textile quotas impacts on trade and as China attempts to export away its excess capacity.

While our forecast does not take into account the latest move by the Chinese authorities to reform their exchange rate regime, we expect the slight appreciation of 2 per cent against the US dollar and the shift from a fixed exchange rate regime to a managed float regime, where the renminbi is bounded between a tight band of 0.3 per cent, to have only minimal effect on the real economy, reducing inflationary pressure and cutting growth by no more than 1/4 per cent. The move will nevertheless dissipate some of the pressures and protectionist threats from the advanced economies. However, given the limited extent of this initial appreciation, speculation of further appreciation in the renminbi will develop and this could further fuel the Chinese housing market. …