Asia's Two Very Different Futures

If China's economy slows, will it drag Asia down with it?

It’s well established that we are living in the Asian Century. Just what the Asian Century will look like is open to debate.

In my view, Asia faces two possible divergent futures, both of which are tied to the trajectory of the Chinese economy. In the first scenario, China’s economy enters into a period of prolonged stagnation or even negative growth rates. In many ways, this is the most likely scenario. China’s economic miracle has been fueled by repressing household income in order to free up capital for state-driven investment.

China is hardly the first country to adopt this model, although the degree with which it has sacrificed household income for state-led investment is unprecedented in scale. As Peking University’s Michael Pettis has pointed out, every country that has pursued this model in the past—including Germany in the 1930s, Brazil and the Soviet Union in the middle part of the twentieth century, and Japan a few years later—has witnessed a period of rapid economic growth followed by prolonged stagnation or crisis. There is good reason to expect the same from the Chinese economy in the years ahead.

It’s hard to overstate the consequences of China entering into a period of prolonged stagnation for both Asia and the world. The impact of China’s economic slowdown would be most severe for Asian nations, many of whom rely on trade for much of their GDP.

China is at the center of this trade. Globally, thirty-five nations count China as their largest trading partners, and many of these are in Asia including: Japan (20 percent), South Korea (20 percent), Taiwan (40 percent including Hong Kong), North Korea (72.9 percent), India, Russia, Vietnam, Myanmar, Kyrgyzstan (51 percent), Tajikistan (37 percent), Kazakhstan (not counting the EU), Turkmenistan (45.3 percent), Iran, and Pakistan. It is also ASEAN’s largest trading partner and the second largest trading partner of Indonesia, Thailand, Laos, and Uzbekistan.

The impact of a Chinese slowdown for the region would not be limited to the loss of direct trade with China. Indeed, most Asian nations count other countries in Asia as most of their other largest trading partners. Thus, the economic impact for each country would be felt both in terms of their loss of trade with China, as well as the loss of trade with other regional states who would also be suffering prolonged recessions caused by their own loss of trade with China.