A China meltdown? Why its Asian neighbors aren't worried.

Even if economic growth in the Middle Kingdom is slowing, Pacific nations are unworried. At least so far. Many have diversified their growth models and aren't wholly dependent on China. 

Chinatopix Via AP
An employee works in a textile factory in Huaibei in central China's Anhui province. Chinese manufacturing is showing signs of further weakness, intensifying fears that the world’s No. 2 economy is losing more momentum.

As the world worries that China’s economic troubles will cause a wide-reaching meltdown, China's closest Asian neighbors are not even poised to panic.

Pacific-rim countries will surely be impacted by China’s four-year economic slowdown, which came into sharper focus in late August with a sudden stock market selloff.

It has been axiomatic for years that problems in China would ripple and harm the neighborhood. But nations from Japan to Vietnam expect to weather problems in the region’s flagship economy, as each now relies on much more than China for prosperity.

Their diversified growth means none of them are yet overly worried, and some even see benefits. Some of these nations trade robustly with the West. Moreover, their stock exchanges and foreign exchange rates, two measures of vitality, also move independently of China. 

Southeast Asia maintains robust growth

In the Philippines, investors sold shares briskly on the Manila exchange early last week after Chinese markets lost 11 percent over two days. Foreign investment banks often treat all Asian shares as risky assets that are ripe for selling when a big player like China posts losses.

But last week, those same investors noticed that the Southeast Asian economy – fed by call center jobs and a passion for consumer shopping – had reported 5.6 percent economic growth from April through June, says Jonathan Ravelas, chief market strategist with Banco de Oro UniBank in metro Manila.

“The local financial markets were slightly shaken but not stirred,” Mr. Ravelas says. “The recent release of the Philippine second quarter GDP data suggests that the Philippines is still one of the region’s sunniest economies.”

Vietnam's major stock exchange had rebounded by midweek as some investors were hoping for final approval of new rules that allow foreign financial institutions from Hong Kong, Singapore, the United States, and Europe to own majority shares in locally listed companies.

“There will be more Vietnamese shares available in the stock universe, so more room to expand,” says Pham Luu Hung, associate investment advisory director with SSI Research in Hanoi.

Chinese share prices fell last week after a 30 percent selloff in June and July, leading to worldwide worry about a crisis.

After China devalued its currency for the first time in two decades last month, Hanoi responded on Aug. 19 with its own one percent devaluation.

Vietnam’s response is seen as putting more money in the pockets of exporters, who exchange US dollars earned overseas for cash at home. China had let its currency weaken 3.5 percent.

Officials in Hanoi, mindful of up-and-coming export-dependent rivals such as Cambodia and Myanmar, have already devalued the country's currency twice this year. The strategy of sequenced devaluation may get picked up and imitated around the Pacific rim, as Asian nations fight back against the weaker Chinese yuan renminbi.

Japan has already let its currency lose value this year with the same effect. The country's large electronic companies found they can make more money from exports to western countries by doing so. In April through June, corporate profits rose 30 percent.

Taiwan, South Korea turn to Silicon Valley

In Taiwan and South Korea, strong economic connections outside China will also help their major electronic firms, economists say. Taiwan’s high-tech hardware developers get many of their orders from Silicon Valley and sell the gear to western consumers.

If there is any economic sloth in Taiwan or South Korea, it will likely be viewed as a reflection of tech industry trends, such as flat computer sales and a waning appetite for tablets, rather than a giant knock-on effect.

Not that a China slowdown will help. 

“They have built themselves up as strong tech hardware producers, so the slowdown in that sector has hurt their economies with the China slowdown only adding to the problems,” says Nitin Dialdas, chief investment officer with Mandarin Capital in Hong Kong.

The large Chinese domestic market this year is showing a preference for cheap, local-brand smartphones that cost about half the cost of an iPhone.

According to World Bank forecasts, China's GDP will grow 7.1 percent this year, down from 7.4 percent last year, the slowest pace in more than two decades. China says its trade with the rest of East Asia totaled about $1.4 trillion last year.

China’s slowing economy could also add more problems for the rest of Asia if weaker factory demand means orders are cut for things like Indonesia’s raw materials, or if cautious consumer spending means cuts on fruit from the Philippines or cars assembled in Thailand.

In that scenario, China-based exporters could feverishly push goods over the border – including to countries such as Vietnam that lack a strong private sector – to escape flagging demand at home. China’s weaker currency would also increase Chinese returns.

Businesses in Vietnam are bracing for Chinese materials and parts to flood their country. Local factories need the goods and exporters can save money by shipping across a border rather than across oceans.

“The softness in Chinese demand will negatively affect Asian economies via the trade channel, especially those highly relying on the Chinese market for goods and services exports, such as Hong Kong, Taiwan, and South Korea,” says Ma Tieying, an Asia economist with DBS in Singapore.

Yet eventually China will start to buoy East Asia again, says Zhuang Juzhong, deputy chief economist with the Asian Development Bank. China performance had driven much of Southeast Asia, Japan, and South Korea until its economic growth topped out around 2011.

“[China's] rising wages will induce its firms to upgrade industries and gradually move up the value chains,” Mr. Zhuang says. “[It's] shift toward consumption and its growing middle class will also create greater demand for consumption goods.”

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