China's recovery seems to be facing another setback. While neighboring economies were expected to depend on China's rebound from the pandemic, they are actually doing quite well on their own. Instead of slumping, some leading indicators had a very good year.
Singapore, which was worried about a recession in 2023, finished the year strongly. South Korea's economy also ended December with strong momentum. In Asia, markets have been focused on when the Federal Reserve will start reducing interest rates. The possibility of China's central bank cutting borrowing costs is not causing much excitement. Even the slight increase in the yuan can be attributed more to the actions of the Fed Chair Jerome Powell than to Beijing's efforts to boost growth.
This is not how things were expected to turn out. There was a lot of optimism about China's role in driving Asia's growth when President Xi Jinping started to relax COVID restrictions in late 2022. The region's prospects were seen as closely tied to China's. But as China's recovery faltered, it became common to predict trouble for other Asian economies. The fact that this didn't happen suggests a broader shift is underway.
Perhaps Asia's economic destiny is not as closely linked to China as previously thought. Or if it is, there are important nuances to consider. Some old ways of thinking may need updating. When I arrived in Washington in 1998, the common belief was that where Japan goes, so does the rest of Asia. I was skeptical: Southeast Asia enjoyed six years of rapid growth after Japan's property bubble burst in the early 1990s. Before I left the U.S. for my current assignment in Singapore, many people were saying that Asia was China and China was Asia. Maybe it's time to question that idea.
Goldman Sachs Group Inc. had to rethink its assumptions. It had hoped for a strong 2023 partly because of a strong China, expecting this to benefit emerging markets in general. "The first lesson is that you want to treat EM and EM ex-China differently,” said Kamakshya Trivedi, Goldman’s head of global currency, rates, and emerging-markets strategy. He also noted the resilience of developing economies in the face of challenges like U.S. interest rate hikes, a strong dollar, and slower Chinese growth.
Recent reports support this view: Singapore, a small economy heavily reliant on global trade, grew faster than expected in 2023. In the fourth quarter alone, its gross domestic product increased by 2.8% from a year earlier. Exports, crucial for the city-state, grew in November after a period of decline, and factory output, which had been weak, picked up.
There was also positive news from Seoul. Exports increased as the year ended, jumping 5.5% in December, well above economists’ forecasts. Adjusted for working days, shipments rose by an impressive 14.5%. South Korea plays a crucial role in the global technology industry, and these figures may indicate a fundamental shift rather than just an economic uptick. "The U.S. has once again become South Korea’s biggest export market,” wrote Hyosung Kwon at Bloomberg Economics. "This may signal a lasting change in supply chains, not just a temporary trend.”
China's struggles are definitely affecting the rest of Asia. The latest purchasing managers’ indexes show that factories are facing challenges, with declining new orders and weak demand. But the important economies in this region are still doing well, despite China's problems.
China's economy will always be important for the region, much like Canada and Mexico depend on the U.S. However, it's important to remember that China is just one factor among many. This may not be a groundbreaking insight, but it's something that has been overlooked in the excitement about China's rise.
It might be time to reassess. Now that would be a significant change.
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