The independence of Hong Kong’s economy, its transparency and its makeup has made it a regional benchmark for market players looking at the broader economic outlook. That was the case in the aftermath of the 1997/98 Asian Financial Crisis and the 2008 Great Recession.
As the fallout from last’s year’s Great Fall of China continues, the former British territory is again offering leads. The omens are far from good. Home prices have fallen by almost 12 percent since China’s economic tailspin took hold in August and retail sales are the worst since 1999.
Importantly, February mortgage applications were down by almost a quarter, month-on-month, and are now at their lowest levels since June 1998 when the Asian Financial Crisis was homing-in on the enclave and its 7.2 million people.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
These are worrying signs for leaders in Southeast Asia, as was recently highlighted by Rajiv Biswas, Asia-Pacific chief economist for IHS Global Insight.
“China’s growing prominence as a key export market for ASEAN exports has increased the vulnerability of many ASEAN countries to China’s economic slowdown,” he recently said in a dispatch published by Wharton Business School.
Few in the markets believe an economic rebound is likely. This is partially due to Chinese debt levels, which have grown to $28 trillion over the last nine years from a relatively benign US$7 trillion. As a percentage of GDP, those numbers are far higher than debt levels in the United States.
Rampant debt initially helped fuel double digit economic growth in China which had incorporated mainland Southeast Asian countries into its supply chains. That had resulted in 20 percent export growth for the Association of South East Asian Nations (ASEAN) over the past decade.
But Chinese growth fell to 6.9 percent in 2015 and is expected to drop further to 6.3 percent this calendar year. These are small numbers for a developing country, more so in China where more than 200 million people still live below the poverty line when judged by international standards.
Exports from ASEAN have fallen dramatically as a result, and the signs from Hong Kong indicate this trend is unlikely to end anytime soon.
“The impact of China’s slowdown on the East Asian manufacturing supply chain and both manufacturing and commodity exports have already hit many ASEAN countries hard,” Biswas said.
As result, the International Monetary Fund (IMF) expects the global economy to grow by just 3.6 percent this year after revising its ASEAN economic outlook for 2016 downwards from 5.3 percent to 5.0 percent.
Further downgrades are expected, particularly in commodity driven countries. Indonesia, Malaysia, Vietnam, Brunei and Myanmar — which rely heavily on returns from palm oil, oil and gas, coal and other commodities like rubber, rice and dwindling supplies of lumber — are being punished severely.
Biswas added the extent of dependence of each Southeast Asian country upon China varies according to the sophistication of their respective economies and their capacity to expand trade.
The Philippines, for instance, is a rare standout. It derives most of its foreign earnings from the production of electrical goods, which are exported to Japan, as well as remittances from Filipinos working abroad. It has thus largely emerged from the current economic turmoil unscathed.
In Hong Kong, the downturn has more recently been exacerbated by a slowdown in inbound tourists from the mainland. Mainland arrivals in Hong Kong slumped by 18 percent over the first two months of the year. According to Bank of America Merrill Lynch, this is unlikely to change over the coming year.
That’s also a scenario that could have further impacts on Southeast Asia, where Chinese tourists have been constituting a larger percentage of arrivals in several regional countries relative to other Western countries.
It’s another unwanted consequence for Southeast Asian states; one that will also test the economic resilience of a region, which for the most part, is struggling to cope.
Luke Hunt can be followed on Twitter @lukeanthonyhunt