How Hard Will the Great Fall of China Hit ASEAN?

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How Hard Will the Great Fall of China Hit ASEAN?

China’s economic woes could take a heavy toll on Southeast Asia.

As recriminations take hold in China over the stock market route, regional governments and their finance ministries are bracing for the economic fallout which analysts expect will take a heavy toll on ASEAN over the next few years.

Whether increased trade accompanying the launch of the ASEAN Economic Community (AEC) – due by the end of December – can offset the anticipated havoc from China is a formidable debate swirling the finance houses within the region.

But investors can expected the shine of a key ASEAN policy plank will be tarnished by a Chinese bureaucracy faced with unprecedented fiscal and monetary issues.

Chinese largesse – through foreign investments, soft loans or direct aid – tourist numbers and purchasing power, will take a direct hit with weak market sentiment likely to prove contagious and economic downgrades likely to cause a rethink over joint ventures and contractual obligations.

Further fears should be fueled by a Bloomberg survey which found the top 100 Southeast Asian listed companies – determined by assets – are carrying six-times the debt levels they had when the Asian financial crisis struck over 1997-98.

According to the dispatch, CP ALL Pcl, Petron Corp and Wilma International Ltd – of Thailand, the Philippines and Singapore respectively – had mounting debts of $392 billion as of June 30 amid a decline in credit quality and expectations that economic growth will continue to ease in line with China’s faltering economy.

Less than two weeks ago Vietnamese officials were warning that “any changes in the global economy would have huge impacts on developing countries like Vietnam, Laos, Cambodia and Myanmar.”

Chief among them was Beijing’s repeated failure to end the massive stock market sell-off – despite a devaluation of the yuan that forced regional governments to follow suit in order to maintain their competitiveness within their respective export markets.

ASEAN’s lower ranked economic countries – Vietnam, Cambodia, Laos and Myanmar – could benefit from the AEC simply because their economies are coming from a low base and they will be opened to an unparalleled trading environment.

“Greater intra-regional trade is credit positive for the region given that growth in other key export markets, such as China, is slowing,” one recent report by Moody’s Investors Services said.

The ratings agency was a little more optimistic about Cambodia, a major benefactor of Chinese aid and a country with very low debt levels due to the destruction of its economy through decades of war.

It said, “Cambodia could see negative spillovers as China’s economy enters a new normal of slower economic growth loans, and investment”.

“Nonetheless, it stands to gain from the formation of the Association of Southeast Asian Nations’ (ASEAN) Economic Community in December 2015, because the country will gain a foothold in the large and growing ASEAN market.”

However, the country would remain plagued by a weak institutional framework and a low per capita income – a prescription for much the region – with a dollarized economy leaving it vulnerable to changes in U.S. monetary policy, in particular an interest rate increase.

Elsewhere, the outlook was mostly much less positive. Fitch ratings said Malaysia and Thailand would also suffer from political ructions at home while Malaysia and Indonesia are being hit hard by a slump in commodity prices. Singapore banks were expected to come under pressure as well.

Banks in the island-state have warned of economic uncertainty for the rest of 2015, with pressure expected to remain on margins due to lower interest rates in China and ASEAN.

This, Fitch said, stood in contrast to the Philippines, where political stability under President Begnino Aquino and a low level of foreign investment in stocks and bonds had shielded it from the market turmoil elsewhere in the region.

Luke Hunt can be followed on Twitter @lukeanthonyhunt.