China’s Neighbours Shouldn’t Cheer On Its Slowdown

China’s economic troubles have so far been a boon to other Asian markets. But if the world’s second largest economy continues to turn sour, things could start to look uglier for them too.

Major Asian stock markets have been doing well in 2023. Japan’s Topix index has gained 24% this year while Taiwan’s Taiex index has risen 18% and Korea’s Kospi is up 15%. That is in contrast to Chinese stocks: the MSCI China index has dropped 6%, despite a strong start of the year.

There are some fundamental reasons why Asian stocks outside of China have gone up. Buybacks and dividends are rising in Japan, while Warren Buffett’s endorsement gave the market another push. The hope of an eventual rebound in the semiconductor industry has lifted stocks in Taiwan and South Korea. But these markets also benefited from foreign investors fleeing Chinese stocks: markets such as Japan and South Korea have seen foreign inflows in recent months. Some multinationals have also been migrating manufacturing out of China and into other Asian countries to diversify their supply chains.

However, Goldman Sachs has noted that correlations between China and other markets in the region have risen lately, indicating potential concerns of spillover.

China is the top trading partner of many countries in the region like Japan and South Korea, and weak demand from China could ripple through to its neighbours. South Korea’s exports to China, accounting for roughly 20% of its total, fell 25% year on year in the first eight months of this year.

And falling investment in China—especially in the real-estate sector—could weigh on commodity prices. So far prices of commodities such as iron ore have been resilient this year as demand from sectors like autos and infrastructure have softened the blows from property construction. But commodity-exporting nations such as Australia, Malaysia and Indonesia could suffer if Chinese investment remains weak.

The confidence crisis in China could also hurt companies selling to the country’s consumers. The number of Chinese tourists, in particular, is still way down from pre-Covid levels for many countries like Japan and Thailand.

As China is the economic juggernaut in the region, the country’s pain is unlikely to be its neighbors’ gain for long.