Concerns about China’s real estate sector are compounding fears about the health of the country’s broader economy and the viability of its investment-led development model — fears that are resonating most loudly in Southeast Asia.
As China’s economy struggles for multiple interrelated reasons, largely the result of government policies and top leader Xi Jinping’s desire for control, Southeast Asian countries that have been buoyed by Chinese growth for three decades are facing knock-on effects on trade, investment and lending.
At the same time, China faces thorny economic problems.
First, there has been no recovery in economic consumption after the pandemic. People are anxious about the economy, rising unemployment and the possibility of future lockdowns, which could lead to a prolonged period of deflation. Domestic consumption accounts for only 38% of GDP.
A woman wearing a mask pushes a cart through a grocery store in Beijing in 2020. China’s post-pandemic economic consumption recovery has not panned out as expected. Photo by Mark Schiefelbein/AP
Second, exports are falling sharply. Exports in August were down 8.8% year-on-year, but this is an improvement from July, when they were down 14.5% year-on-year. Exports to the US and EU were down 17.4% and 10.5%, respectively.
Third, portfolio investment is flowing out of the country — more than $3.4 billion in the first two weeks of August alone — but foreign direct investment is still flowing in.
Western and Japanese companies are also actively diversifying their supply chains to India, Vietnam and other emerging markets: HP has announced it will move its PC production lines to Thailand and Vietnam, and Apple has moved some of its production lines to Vietnam and India.
Crackdown hurts feelings
China’s arrests of Mintz and the Bain due diligence investigators, combined with new espionage laws and arrests of foreign executives, are a new deterrent to foreign investors.
The crackdown comes on top of Xi Jinping’s tightening grip on the most innovative parts of the economy – the technology sector in general, and fintech in particular – in an effort to wrest control.
Another problem is China’s rising labor costs as the population shrinks. But youth unemployment was above 20% before the government stopped publishing the statistics in August. Wages continue to rise relative to China’s competitors.
A man walks in front of the construction site of a residential building being built by Chinese property developer Country Garden in Beijing, 11 August 2023. Concerns about China’s real estate sector are growing fears about the health of the country’s overall economy and the viability of its investment-led development model. Nowhere are these fears more prevalent than in Southeast Asia. Photo: Tingshu Wang/Reuters
Closely linked to the real estate crisis is debt. China is awash in debt, with public debt standing at 267% of GDP. Local government finance departments are owed more than $9 trillion, half China’s GDP. And a slowing economy and falling property values and demand will make paying back that debt much harder, especially in the interior. Property sales account for roughly one-third of local government revenues.
Evergrande’s default and Country Gardens’ near default, along with those of dozens of other overleveraged, indebted property developers, could set off a chain reaction. Country Gardens posted a $6.7 billion loss for the first half of 2023 and has about $190 billion in outstanding debt. Non-performing real estate loans at the 32 largest banks rose 44% from a year ago, according to Nikkei.
Finally, China’s long-term strategy of investment-led growth is showing signs of stalling. The massive debt it has incurred to build roads and high-speed rail is no longer driving economic growth. China’s railroads alone owe nearly $1 trillion.
China is still an $18 trillion economy growing at 3%, but it has entered an era of slow growth.
For 30 years, the Chinese economy has been leading Southeast Asia. But for the first time, China’s economic performance is lagging behind many of its neighbors. So what does the end of China’s high growth era mean for Southeast Asia?
Goods and tourism hit hard
First, trade will take a hit. China is the largest trading partner of any country in the region. Bilateral trade between China and ASEAN grew 50% from $641.5 billion in 2019 to $975.3 billion in 2022. Trade in the first half of 2023 is expected to fall 1.5% year-on-year to $447.3 billion.
Exports of raw materials to China will certainly decline. This will hit Indonesia the hardest. In 2021, Indonesia exported $54 billion worth of goods to China, most of which were natural resources. But other countries in the region may see commodity prices fall due to reduced demand.
Countries such as Vietnam, which are part of China’s southern manufacturing supply chain, will also see their exports take a hit.
People attend a job fair for college graduates at a gym in Hefei, Anhui province, on Sept. 4, 2023. China’s youth unemployment rate was over 20 percent before the government stopped publishing the statistics in August. Source: China Daily via Reuters
China’s foreign investment in the region will be mixed across sectors.
Chinese companies need to diversify markets and seek higher returns amid a slowing economy. China’s tech industry continues to invest in Southeast Asia as it is currently unable or unwilling to make large investments at home.
A recent report on Chinese AI investments in Southeast Asia by Georgetown University’s Center for Security and Emerging Technology found that Alibaba, Tencent and Huawei are building more data centers in the region than their U.S. rivals and are also increasing investments in local research and development centers. Tencent is one of Vietnam’s four “unicorns” and a major investor in Vietnamese technology company VNG, the country’s largest cloud service.
Chipmaker Tsinghua Unigroup, which already has manufacturing facilities in Singapore, Malaysia and Indonesia, announced on the sidelines of the recent ASEAN summit that it would expand its production and research and development in Southeast Asia.
Inevitable ripple effects
China will continue to seek to maintain regional economic leadership in the absence of the United States, which ceded influence to China when it withdrew from the Trans-Pacific Partnership (TPP) trade and investment plan in early 2017.
China is pushing for the full implementation of the Regional Comprehensive Economic Partnership (RCEP), which includes all 10 ASEAN countries, and is negotiating an FTA with ASEAN covering a market of 2 billion people. The US-led Indo-Pacific Prosperity Economic Framework (IPEF) is a poor alternative to the ill-fated TPP and a poor counterweight to RCEP.
Many Chinese companies will continue to invest in Southeast Asia to circumvent U.S. and EU sanctions and investment restrictions. Moreover, as Western restrictions on high technology continue to confine China, companies will likely look to see what they can acquire in Southeast Asia through mergers and acquisitions.
China will continue to seek to gain an advantage in certain areas, especially electric vehicles. BYD is building a $1.44 billion assembly line in Thailand and has announced another line in Vietnam to compete with VinFast. China will continue to make strategic investments in Southeast Asia, which has deposits of many of the raw materials needed to produce electric vehicles, such as nickel and rare earth elements.
Chinese Premier Li Qiang waves after posing for a group photo with leaders and foreign ministers of the Association of Southeast Asian Nations (ASEAN) in Jakarta, Indonesia, September 6, 2023. China will continue to seek to maintain its economic leadership in the absence of the United States, which withdrew from the TPP in early 2017. Photo by Willy Kurniawan/Reporters via Reuters
Still, spillover effects from China’s debt-laden real estate sector will be felt in the region.
Chinese property developers across Southeast Asia have been hit hard, with considerable anger in Malaysia over unfinished buildings, mortgage payments and backlogged developments. Country Gardens’ $100 billion Forest City project in Johor is only 15 percent complete, according to Nikkei, and property values have plummeted. It’s a reminder that China has exported its debt-ridden property development model and bubbles.
Massive capital flight from China is likely to continue. The number of Chinese family foundations in Singapore has surged from 400 in 2021 to 1,500 by the end of 2022. An investment of $1.8 million allows one to apply for permanent residency in Singapore. And Chinese who had parked their money in Hong Kong are increasingly looking to put it out of Beijing’s reach. This has led to a surge in Chinese property purchases in Singapore, and to a lesser extent in Malaysia and Thailand.
While a Chinese slowdown is seen as both a positive and negative thing in the West, there are much bigger concerns in Southeast Asia about lower trade, potentially less investment, less infrastructure financing and less development aid, which is expected to result in a net decline in Chinese tourists to the region.
Multilateral economic institutions and major commercial banks have revised down their 2023 GDP growth forecasts for Thailand, Singapore, the Philippines and Vietnam, citing China’s slowdown in part.
China’s rise over the past few decades may have been rapacious, but it was also predictable and good for growth. China’s decline is anything but, and that is what makes the region’s business and political elites so uneasy.
Zachary Abuza is a professor at the National War College in Washington and an adjunct lecturer at Georgetown University. The opinions expressed here are Abuza’s own and do not necessarily reflect the positions of the Department of Defense, the National War College, Georgetown University, or Radio Free Asia.
