China's Economic Downturn Has Ripple Effects Across Asia

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China’s slowing growth is sparking warnings of contagion in Asia as slowing consumer demand and slower production hit neighboring countries closely linked to the world’s second-largest economy.

South Korea’s production slump has reached its longest in nearly half a century, while other major exporters in East Asia are also hit by weak demand.

South Korea, Asia’s fourth-largest economy, is considered a pioneer of the region’s technology supply chain, which has helped support global growth for decades.

The country’s exports fell in July at the sharpest pace in more than three years, led by smaller shipments of computer chips to China, while purchasing managers’ indexes showed Friday that factory activity fell for a 14th straight month in August, its longest decline since the course of the survey.

Readings in Japan – where activity fell for a fifth straight month – and Taiwan also pointed to a decline in factory output and weaker external demand.

Concerns have increased in recent weeks after China’s economy slipped into deflation, raising fears about weak consumption, a weakening currency, an unstable real estate sector and unsustainable levels of local government debt.

Official data showed on Thursday that China’s manufacturing sector contracted for a fifth straight month in August, a sign that slowing global demand is continuing to weigh on the Chinese economy.

“To borrow an old saying, when China sneezes, Asia catches a cold,” said Vincent Tsui, an analyst at Beijing research group Gavekal. “As Chinese politicians resist calls to boost flagging growth with stimulus measures, the consequences will be felt across the region.”

Tsui warned that the trading and financial hubs of Hong Kong and Singapore would be most exposed to a weakening China, with Chinese demand accounting for 13 and 9 percent of gross domestic product, respectively.

South Korea’s finance ministry has set up a special task force to monitor China’s economic situation and the country has introduced a new national holiday to boost consumption.

“Korea is unlikely to see a recovery soon unless the Chinese economy recovers quickly,” said Park Chong-hoon, head of research at Standard Chartered in Seoul, also noting the challenges posed the tensions between the USA and China and the substitution of Chinese imports.

Australia’s economy has proven resilient at a time of trade tensions with China, which has imposed tariffs on a range of goods from coal to barley to lobster, many of which were eliminated in 2023.

However, the country now appears vulnerable to the economic woes of its largest trading partner, with the Australian dollar falling to its lowest level in 10 months against the US dollar as expectations for China’s growth were scaled back.

The country’s largest companies, including miner BHP, have also begun to raise possible concerns about their prospects if China fails to boost growth.

Vietnam, a major exporter of clothing and textiles, footwear and wooden items, and electronics, reported exports fell 14 percent in the second quarter from a year earlier, pointing to a slowdown in industrial production this year.

Data this month showed Malaysia’s growth rate hit its lowest level in nearly two years as the country also struggled with a slowdown caused by its top trading partner.

Thailand’s economy also grew much slower than expected in the second quarter, due to political instability at home and lower tourism from China.

While Asia is under immediate pressure, Gavekal analysts warned that other regions could face further problems as well.

“As China’s economy weakens, foreign suppliers that have grown strong by supplying raw materials and machinery are facing lean times. The cratering of China’s real estate market will not reverse anytime soon and conditions could get worse before they get better,” they said.

Additional reporting by Leo Lewis in Tokyo, Mercedes Ruehl in Singapore, Nic Fildes in Sydney and William Langley in Hong Kong