China downturn a challenge for S’pore, HK

FURTHER market corrections in China would cause a sharp drop in share values in both cities, says Coface economist Charlie Carre . . .

PARIS — Credit insurer Coface says Mongolia will be the country most affected by China’s downturn because it is so closely involved with China for both trade and investment, selling 90 per cent of its exports into China.
Mongolia also does not have a safety net, and it is suffering from high public debt and external imbalances. But Hong Kong and Singapore also face major challenges, says Charlie Carre, Coface Economist for Asia (ex Japan).
As she sees it, the stock markets of both Singapore and Hong Kong are so closely correlated to China that further market corrections in the Chinese market will cause a sharp drop in the value of shares in both cities.
“This will have an impact on domestic consumption because of the wealth effect,” Carre says. “In China, only a small number of households will be affected compared with the percentage of households affected in Singapore and Hong Kong. Wealth effects appear to be highest in those countries with liquid stock markets and enjoying a high standard of living.
“But because both Hong Kong and Singapore have solid macro-economic fundamentals, they have the ability to face the difficulties that could occur.”
“India also will not be affected by a slowdown in China because it has limited trade with China.” But she worries that the Modi Government’s programme for reform and economic development, such as GST reform, is stalled.
Of China, Carre says Coface still sees no sign of a ‘hard’ landing, but she says there are now more worries about corporate risk. “We don’t worry about systemic risk as the authorities have the capacity to intervene in the event of a major crisis and are closely monitoring the slowdown by using fiscal stimulus and monetary policy,” she says. “Nevertheless, there is deterioration in corporate risk with a high level of debt and overcapacity, and we downgraded our China country risk assessment last June from A3 to A4.”  
Other Asian countries impacted by the slowdown in China will be Indonesia and Malaysia, she says, because of their dependence on exports of raw materials.
South Korea, which is a major commercial partner of China (about 25 per cent of its exports are to China) and Taiwan are also at risk, but not to the extent of those relying on China’s thirst for resources. “With Taiwan,” she says, “we will have to wait for third quarter figures to see what the real impact has been.”
Thailand, she adds, has a number of specific issues, including the political situation which has damaged the business climate.   
“Tourism (in Thailand) has recovered, but the economy is still struggling, and I cannot be very optimistic about export growth into China. Thailand has high wage costs and has not improved productivity enough because of a shortage of skilled labour and investment in R&D,” Carre says.