Economic rebalancing has mixed impact on ASEAN

As the biggest trading partner of the Association of Southeast Asian Nations (ASEAN), China's economic rebalancing and policy re-orientation will have an adverse effect upon ASEAN economies in the short term but will benefit the region in the long term, research institutions have said.

The latest figures from China's State Council Information Office showed China is now the ASEAN's biggest trade partner, with trade volume valued at $210 billion in the first half of 2013, which is nearly four times more than that in 2002.

ASEAN is also China's fourth most important destination of foreign direct investment, worth $30 billion.

As China's economy has slowed in nine of the past 10 quarters and the government said it will tolerate slower growth to push reform aimed at reducing its reliance on the massive investment in favor of more services- and consumption-led growth, there are concerns about the impact of China's slowdown upon ASEAN economies.

Nomura Global Markets Research said under the "China slowdown" scenario, the impact on ASEAN equity markets overall will likely be smaller than in the rest of the Asia-Pacific region, excluding Japan.

The impact on direct earnings in Thailand, the Philippines and Indonesia is likely to be limited as over 90 percent of revenues for listed companies of these three markets are derived domestically.

On the other hand, the impact on equity markets of Malaysia and Singapore may be more visible, with the chemicals, energy and gaming sectors likely to be affected in Malaysia, and tourism and, in particular, property sectors most vulnerable in Singapore.

On foreign exchange front, the performance would vary greatly among ASEAN economies from a rapid slowdown in China's economy.

Nomura Global Markets Research believed that open economies such as Singapore are most at risk from a slowdown in trade and potential capital outflows.

Depreciation risks also exist in Malaysian currency, as the country has the high level of foreign bond positioning and is susceptible to the risk of capital outflows.

While Thai baht's underperformance is unlikely to be as severe as the currencies of Singapore and Malaysia, its vulnerability has grown given its increased dependence on China through trade channels.

In contrast, the currency performance of Indonesia and the Philippines should prove to be more resilient to China's slowdown, since recent Bank of Indonesia's tightening stance should help to stabilize rupiah, and the strength of the Philippines'economy driven primarily by domestic demand and a structurally strong current account surplus should make its peso to become a relative out-performer in the region.

CIMB Research said given the importance of vertical supply chain links with China, ASEAN trade performance will be hurt if China's exports slow. Among ASEAN economies, Malaysia's export share to China is the largest at 12.6 percent, followed by the Philippines, Thailand, Indonesia and Singapore at 11.8 percent, 11.7 percent, 11.4 percent and 10.8 percent respectively.

The sectors and products in ASEAN region that will be hit by slower Chinese demand due to economic slowdown are the suppliers of resource-based raw materials. These include chemicals and chemical products, palm oil and rubber for Malaysia, mineral fuels, oils and animal or vegetables fats and oils for Indonesia, organic chemicals, plastics, rubber and electrical machinery and equipment for Thailand; and Singapore's major export items to China liked petrochemicals, processed foods and electronics and electrical products.

However, CIMB Research also pointed out over time, the rebalancing in the China economy towards stronger domestic consumption will offer larger as well as more long-lasting benefits to its ASEAN trading partners, if they are able to successfully expand their direct and indirect access to the Chinese consumer goods markets.

In addition, given the large offering of investment prospects in Malaysia, Thailand and Indonesia, China's commitment towards long-term investment in ASEAN will continue even though direct investment flows from Chinese companies into Asia may be dampened in the short term due to slowdown.