When China sneezes, the old saw goes, Southeast Asia catches cold.
Two months since the coronavirus, or Covid-19, epidemic started its lethal spread from China, the full contagion effect on neighboring Southeast Asia’s now swooning economies is still uncertain as global panic transmits to Europe and the US.
The early prognosis, however, is not good. Last month, equity markets in Thailand, Indonesia and the Philippines fell to among the ten worst performers worldwide as investors dumped the region’s shares as proxies for China’s infectious slowdown.
Most regional countries have already significantly downgraded their economic growth forecasts for 2020, due both to the viral impact on their Chinese traveler-dependent tourism sectors and the adverse effect on their various China-linked supply chains.
Last week, Indonesia announced a US$742 million aid package for its tourism sector, while Cambodia has implemented a tax holiday for hotels in Siem Reap, the hub of its Angkor Wat ruins which every year until now draw millions of Chinese tourists.
Singapore will spend an additional $4 billion this year on subsidizing virus-hit businesses. Vietnam is also drawing up a stimulus package, as its factory production levels recently fell to a six-year low, according to purchasing manager surveys released by IHS Markit, an analytics firm.
Thailand, widely expected to take the biggest viral hit in the region, is now deliberating a 100 billion ($3.2 billion) emergency relief package for its ailing tourism sector which relies heavily on Chinese tourists and contributes 20% of gross domestic product (GDP).
The situation, despite all the emergency spending, could get worse before it gets better for the region’s China-linked economies.
For one, reports suggest that there could be far more Covid-19 cases in the region than officially reported, meaning a confidence-draining sudden spike in cases, as recently seen in Japan and South Korea, is possible.
Doubts center in particular on Myanmar and Laos, which border China but have not yet declared any cases, as well as Indonesia, which last week finally acknowledged two cases after widespread speculation of a government cover-up.
A study by researchers at the Harvard T.H. Chan School of Public Health argued that it was statistically implausible that there are not more cases in Thailand, Cambodia and Indonesia, considering their strong connectivity with China.
How quickly China and Southeast Asia recover economically will depend ultimately on how efficiently the disease can be genuinely contained, and after the trauma caused by the outbreak how willing the region will be to reconnect to China on the same open terms as previously.
Those will be tough choices considering the ill-effects many are now feeling because of their over-reliance on China for recent economic growth.
That super-fast growth may not resume any time soon. Even before the coronavirus outbreak China’s economic growth slipped to 6.1% in 2019, its lowest rate in 29 years, due in large part to the disruptions caused by the US-China trade war.
Last year, Singapore’s GDP growth hit its lowest since 2009 due to the ill-effects of the trade war and with the coronavirus outbreak economic analysts are now talking about a possible recession in 2020.
Malaysia’s trade-geared economy also recorded a ten-year low in GDP growth in 2019.
Analysts are of split minds on how severely the virus crisis will hit Southeast Asia, with the more optimistic forecasts predicting a return to business-as-usual in April or May.
“We expect some minor economic impact on the Southeast Asian economies after the outbreak is contained and the Chinese economy is back to operating normally,” says Ashu Agarwal, an Asia Pacific analyst at Ducker Frontier, a global market intelligence firm.
Much will depend on what measures China puts in place to guard against a second wave of the disease’s spread through a resumption of outbound tourism. Regional governments, for their part, will also have to decide how much Chinese capital they are willing to absorb.
According to the Washington-based Institute of International Finance, China’s hidden capital flight reached a record high of $131 billion in the first six months of 2019, as cash-rich Chinese moved wealth abroad often into dollar-backed securities.
Some analysts expect even greater Chinese capital flight in 2020 in response to the coronavirus crisis.
Property markets in Southeast Asia, including Thailand and Cambodia, have to date benefited the most from those capital outflows. But there are indications that China could double down on earlier measures to stem the fund outflows in a bid to stimulate its domestic economy.
One casualty could be China’s Belt and Road Initiative (BRI), Beijing’s $1 trillion global infrastructure building program that envisions new connecting trains, roads and ports in Southeast Asia.
Work has already stalled on many China-funded projects in the region, often because Chinese workers have been barred from leaving the mainland to return to their construction and engineering jobs in the region.
In Indonesia, for instance, work on the China-backed Batang Toru hydropower has ground to a halt, while the BRI-sponsored $6 billion Jakarta-Bandung high-speed rail project is now also expected to be hit by long delays.
“If China runs into a credit crunch as a result of slowing growth or a deeper recession, then selling off state-owned assets will be a first grabbed tool in the toolbox,” predicts Brian Eyler, director of the Southeast Asia program at the Stimson Center, a US-based think tank.
“Perhaps Chinese [state-owned enterprises] would prefer selling off projects abroad to selling domestic projects, and projects in risky countries, like in Pakistan or Cambodia, might be first on the list,” he added.
It is unlikely, however, that major strategic BRI projects will be affected, including the $6 billion Laos-China high-speed railway that ultimately aims to connect China through mainland Southeast Asia down to Singapore. Work on that rail line is still up and running, Eyler noted.
The fate of many of those BRI projects will likely depend on China’s domestic politics. Shipping hundreds of billions of dollars abroad might have been acceptable when China’s economy was in good health, but a severe economic downturn could quickly change national sentiment on BRI.
“Eventually more and more Chinese stakeholders at home might begin to question the value of these subsidized projects [abroad] over the lack of quality infrastructure in other sectors, such as health or education, at home,” says Eyler.
There are also questions about how the ruling Chinese Communist Party (CCP) will respond diplomatically after the crisis ebbs.
On February 20, China hosted a hastily assembled summit in Laos to discuss the impacts of the coronavirus outbreak with its Southeast Asian partners.
Ostensibly, it was intended to praise regional unity; China’s Foreign Ministry reportedly thanked Southeast Asian states for “[making] us feel that this winter is not that cold and spring is coming.”
But Beijing also used the occasion to lambast regional states that had imposed strict controls on incoming Chinese visitors, like Vietnam and Singapore, which were among the first countries in the world to impose travel bans in late January.
Cambodian Prime Minister Hun Sen is the only foreign leader to actually travel to Beijing during the virus outbreak, visiting in mid-February. Clearly, his intention was to show Beijing that Cambodia remained a loyal ally throughout the ordeal.
Bill Bishop, of Sinocism, a Washington-based China newsletter, noted this week that “the Chinese government was very critical of countries like the US that put restrictions on travel from China.” He added that “it will be interesting to watch how the Chinese government spins it now that they are on the other side.”
The CCP needs China’s economy to recover as quickly as possible since much of its legitimacy rests on delivering consistently strong economic growth.
But if Southeast Asian countries like Singapore and Vietnam don’t ease and maintain travel bans for longer than Beijing deems necessary, it could prompt reprisals from Beijing, some analysts predict.
“The coronavirus has revealed some cracks in Southeast Asia’s growth models,” states a recent report published by the Carnegie Endowment for International Peace, a foreign policy think tank.
“Many of China’s neighbors have leaned too heavily on external demand and China-centric supply chains to drive their own domestic economic growth.”
Singapore’s Minister for Trade and Industry Chan Chun Sing, for instance, vowed last week that the city-state will “make sure that we’re never held to ransom by a single source or a single market.”
There are also mumblings from other regional governments that they need to diversify their supply chains away from China, though whether this is achievable is another matter.
Almost half of Vietnam’s imports and a fifth of Malaysia’s originate from China. The majority of other Southeast Asian states also source most of their manufacturing-related inputs from China.
“Businesses might be looking at alternatives from Vietnam, but as the virus becomes more global over recent days, even supply chains which they thought are safe from interruptions could be disrupted,” Song Seng Wun, an economist at CIMB Private Banking, told the South China Morning Post.
Some Southeast Asian states, especially Vietnam, might even benefit from an economic slowdown in China if it expedites the the shift in investment to the region by companies that were already diversifying out of China, says Ducker Frontier’s Agarwal.
Either way, the coronavirus outbreak has created deep cracks in China’s economic relations with Southeast Asia that had already been developing for many years. And even when the virus crisis finally passes, it’s not clear the two sides will be as gung-ho on integration and connectivity as they were previously.