The sharp dive in Chinese stocks this week sent a sudden chill through markets around the world, from New York to Mumbai, India. But for months, some of China’s nearest neighbors and top trading partners have felt cool breezes blowing through the world’s second-biggest economy.
Take Taiwan, an export-reliant island of 23 million people about 100 miles off China’s southeastern coast. Nearly 40% of its exports, and 57% of its outbound foreign investment, go to China. Taiwan’s government had forecast its economy would expand at least 3% this year.
But with demand slackening on the mainland for high-tech goods and other items, Taiwanese officials this summer slashed their growth target nearly in half, to 1.65%, and some analysts say even that may be a reach. A survey by the Taiwan Institute of Economic Research released this week found 18.8% of Taiwanese manufacturers were optimistic about the next six months, down from 25.2% in June.
Confidence has been shaken further as Taiwan’s stock market slumped along with Shanghai’s, and China devalued its currency, making Taiwanese exports relatively more expensive. That has sent authorities in Taiwan scrambling to prop up share prices through government purchases — and consider a devaluation of Taiwan’s currency to prevent further economic damage.
“Honestly speaking, we are now at a very difficult time,” said Connie Hui-chuan Chang, director-general of Taiwan’s National Development Council, a key economic planning body. “Because of the influence upon us of what happened in China …. the Cabinet has been working out how we can boost up our economic growth again.”
Taiwan isn’t alone. Investors, small-business owners, chief executives and government officials from Japan to Vietnam to Australia are rethinking and readjusting as China’s slowdown ripples across Asia and other parts of the globe.
In the U.S., the stock market surged Wednesday, with the Dow Jones industrial average soaring about 619 points and finishing with a gain of nearly 4% after severe declines in five consecutive sessions, mainly in response to China’s economic woes. The broader Standard & Poor’s 500 index gained 3.9%, and the Nasdaq composite index also shot up about 4.2%.
But the same could not be said for China, where the Shanghai Composite dropped 1.3% on Wednesday after a volatile day of trading. The Shenzhen Composite also fell 3.1%, while ChiNext, a Shenzhen-based exchange that hosts fast-growing enterprises, ended down 5.1%.
Chinese stocks have fallen about 16% over the last week, rattling markets worldwide as investors raise concerns about the Chinese leadership’s management of the country’s slowing economy, even though Chinese markets are not highly integrated with the global financial system and many analysts and investors treat them as an entity almost separate from other economic indicators.
China plays an increasingly central role in global trade — the country accounts for at least 15% of global output — and panic about the volatility of its markets has cut trillions of dollars from exchanges around the world, in both developed and emerging economies.
“Australia and Indonesia, the big exporters that are depending on Chinese demand for everything from copper to iron ore, will be affected [by China’s slowdown]; Brazil is another one,” said Damien Ma, a fellow at the Chicago-based Paulson Institute, which focuses on sustainable growth in the U.S. and China.
“People are not sure if Chinese demand is going to be there. The other area is Middle East countries, with oil down to $40 a barrel. Car sales in China are still growing but slowing, that adds to uncertainty about where demand is coming from. Outside of cars, you have industry, but that’s slowing in China too. So that’s put downward pressure on oil markets.”
China’s economy grew at 10% or more a year for much of the last quarter of a century, but since the 2008 global financial crisis, it has relied on what the International Monetary Fund calls an unsustainable growth model, based on excessive loans and investments, that has created big risks in the banking, real estate and corporate sectors.
Chinese leaders say they are intentionally moving toward a model of slower, more sustainable growth, aiming for better-paying jobs in the service sector rather than low-wage factory jobs, more innovation and a more robust consumer sector. Growth, which slowed to 7.4% last year, is expected to ease further to 6.8% this year, the IMF said in July.
The World Bank has estimated that a 1-percentage-point decrease in China’s growth rate could slow growth in the wider Asian region by about 0.2 percentage points.
China’s strong economic expansion has given a lift to many countries in recent years, albeit for different reasons. Australia, for example, benefited handsomely as miners exported raw materials to China to help fuel its infrastructure boom; between 2009 and 2014, Australia’s trade with China grew by almost fivefold.
Demand in China for Australian agricultural products has also gone up and, increasingly, wealthy Chinese have sought to buy real estate Down Under and send their children to school there too. A study last year by the National Australia Bank found 200,000 jobs in the country were sustained by direct exports to China.
But slackening demand in China has pummeled the profits of mining companies and commodity prices have tumbled. Australia’s Fortescue Metals said this week, for example, that annual profit had dropped nearly 90% because of lower demand in China, while mining giant BHP Billiton this week reported an 86% dive in annual profits. Australia’s central bank in May pared its 2015 and 2016 growth forecasts.
Japan, meanwhile, has been selling industrial machinery to Chinese factories and automobiles and other products to Chinese consumers. But slowing demand in China has hit Japan’s manufacturers — overall exports from Japan dropped 4.4% in the second quarter, and Japan’s gross domestic product contracted 0.4%.
“I think we have been seeing the lead-up to various economic problems in natural resource providers to China get[ting] hit very hard economically. As [China is] one of Japan’s larger trading partners, I think the exports [to China] will feel the pressure,” said William H. Saito, a special advisor to the Cabinet Office of Japan. But Japan might see substantial benefits, he said, as prices for fuel and other natural resources have dropped.
Until recently, a weaker Japanese yen had been a key factor both in boosting exports and attracting more visitors. Foreign tourists spent about $16.8 billion in Japan in 2014, up 43% from a year earlier. A large number of those travelers were from China, and Chinese shoppers spend more money than other foreigners, buying goods including fancy toilet seats and luxury handbags.
But now, with China’s devaluation move and uncertainty over the Chinese economy, the yen has been gaining, making Japan more expensive.
Japan’s Tourism Agency said Wednesday that it was too soon to discuss possible effects on tourism from China’s market drop and currency devaluation. But an employee at a large travel agency in Tokyo said: “I’m not authorized to speak for the company, but without Chinese tourists, we’d be doing terrible business. I can’t imagine there’s anyone who isn’t concerned about a potential drop-off in Chinese tourists.”
Like Japan, South Korea also has seen exports slowing. Exports have fallen every month this year through July, and shipments to China, South Korea’s biggest market, dropped 6.4% last month compared with a year earlier, the steepest decline in five months.
One country that has benefited from China’s slowdown and shedding of low-wage factory jobs is Vietnam, which has attracted new manufacturers, boosting its exports and GDP. But the recent turmoil hasn’t spared the Southeast Asian country entirely.
Bill Stoops, chief investment officer with Dragon Capital, a Ho Chi Minh City-based asset management firm with 90% of its $1.15 billion in local equities, has watched his holdings take a double China-linked hit in recent days: Not only did Vietnam’s stock market follow China’s down, but Vietnam devalued its currency after China did (Vietnam’s third such move this year), in an effort to keep its exporters competitive. That had the effect of reducing the value of equities for foreign investors like Stoops.
“What’s happening is an act of desperation by China and it starts dragging down other countries with it,” Stoops said. “China’s police-state economic model is falling apart.”
The signals from China have investors worried that economic conditions on the mainland are worse than the government has let on, said Dan T. Veru, executive vice president of Palisade Capital. China’s devaluation in particular, he said, “creates additional fear that other emerging market countries in Asia will have to do the same thing, setting off a domino effect that creates dramatic selling-out of equities.”
But Beijing-based Capital Economics has called the recent sharp drops in global stock markets “completely out of proportion” to what’s really going on in the Chinese economy. U.S. investors in particular, the analyst group said, have little to fear as China slows because U.S. exports to China have been largely stagnant for the last few years and account for only 1.2% of America’s GDP.
“Even in the unlikely event that China did suffer a hard landing, the impact on the U.S. economy would be muted,” the group said.
Meanwhile, trade experts at the research firm IHS said Wednesday that despite the recent shocks over the Chinese stock market slide and the country’s economic slowdown, they expect trade from China and Southeast Asia to North America to boom in the next five years, with China’s trade increasing 5% a year through 2020.
“These increases will not be the double-digit rises seen before the 2008 global economic crisis,” said Krispen Atkinson, principal analyst at IHS Maritime. “However, an increase of over 30% in the next five years underscores China’s intent to remain a new trade hub and spoke linchpin for the rest of the economic world.”
Roy Chun Lee, deputy executive director of the Taiwan WTO and RTA Center, a trade-focused think tank, said he believed that while the downturn in China was real, it probably wouldn’t last for a prolonged period.
Taiwanese companies, he said, are investing more and more in the service sector in China — everything from day care and education to healthcare — while looking to Vietnam and other Southeast Asian countries as a new manufacturing ground.
“Consumption is taking off in China,” he said. The trick now, he says, is for China’s government to keep things stable enough to encourage ordinary people to buy stuff.
“If the government creates the confidence for the people to keep spending money,” he said, “then I think they will become the next generation, the main pillar for China’s economic growth.”
Times staff writers Jonathan Kaiman in Beijing and James F. Peltz in Los Angeles and special correspondents Jake Adelstein in Tokyo and Ralph Jennings in Ho Chi Minh City contributed to this report.