India, China and Asean Economic Growth

Jakarta Globe, Tai Hui, March 25, 2010

China is Southeast Asia’s largest trading partner, but now it has some competition. In 2009, India ran a larger trade deficit with Asean-6 (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) than China, despite the fact that China’s total trade with the grouping was almost fives times India’s.

As result of the significant narrowing of China’s trade deficit with Asean-6 in recent years, its direct contribution to Asean growth has diminished. A narrowing deficit reflects an increase in Chinese-made manufactured products entering Asean markets, as well as China’s weakening demand for Asean-made components of manufactured products. Lower commodity prices in late 2008 and 2009 may offer a partial explanation (commodities are an important source of Chinese demand for the region’s exports), but we do not see this as a satisfactory explanation.

In India’s case, faster economic growth in recent quarters and demand for raw materials have led to a considerable increase in imports from Asean. Given India’s lack of natural resources, and the fact that its manufacturing sector will take years to develop, India may well replace China as a key source of export growth for Asean countries.

In 2004 and 2005, China ran a $21 billion deficit with the region. China’s rising net imports from Asean-6 between 2000 and 2006 mirrored its growing trade surplus with the United States and Europe — China served as a manufacturing hub, gathering components from within the region for final assembly before shipping finished goods to the United States and Europe. Trade between China and Asean-6 rose from $38 billion in 2000 to a peak of $227 billion in 2008, before dropping to $207 billion amid the collapse in commodity prices in 2008-09 and weaker global growth. This represented a compound annual growth rate (CAGR) of 23.4 percent between 2000 and 2009.

China’s trade deficit with Asean-6 narrowed significantly after 2006. Between 2006 and 2009, China’s imports from the region expanded at a CAGR of 5.7 percent, while its exports to the region grew by 14.1 percent. While both rates slowed from the preceding years, the moderation in imports was more substantial. Vietnam has snapped up Chinese products faster than the rest of the region, with its share of total Asean imports from China rising to 15.9 percent in 2009 from 10 percent in 2004. The Philippines and Thailand, on the other hand, have scaled back their purchases of Chinese products.

In terms of Asean-6 exports to China, Thailand and Malaysia outperformed at the expense of Singapore and the Philippines. The strength of Thai and Malaysian exports is perhaps surprising, given that these two economies’ export structures share the greatest similarity with China’s. We believe strong commodity prices were behind the gains, as commodity producer Indonesia also saw its share of Asean-6 exports to China rise during the period. Nonetheless, the slowdown in Asean-6 export growth to China relative to imports from China is consistent with anecdotal evidence that China is becoming less dependent on imported components as it expands its range of manufactured products.

Of the Asean-6 economies, Indonesia, Singapore and Vietnam are already importing more from China than they are exporting to the country. While China runs a trade deficit with the Philippines, it is narrowing quickly. Thailand and Malaysia have been able to maintain their trade surpluses with China, but the concern is that tariff reductions as a result of the China-Asean Free Trade Agreement may tip the balance further, accelerating China’s exports of highly competitive manufactured products to Asean.

Until 2006, India’s trade balance with Asean-6 hovered around zero. This was partly because India’s total trade with Asean-6 was very limited, at just $6.7 billion in 2000. The pace of growth in the value of Asean’s exports to India has picked up considerably since 2003 with exports reaching $43.7 billion by 2009.

As trade between India and Asean-6 has expanded, India has emerged as a net importer from the region. Unlike in the case of China, this is not a result of the regionalization of the supply chain, but rather reflects India’s demand for natural resources. Some 87 percent of India’s imports from Asean-6 in 2009 came from Singapore, Malaysia and Indonesia. Malaysian and Indonesian exports to India largely comprise commodities and raw materials. Singapore is India’s key export market in the region, absorbing 45 percent of Indian exports to Asean-6. Rather than reflecting Singapore’s underlying demand for Indian products, we believe this is more a function of Singapore’s role as a regional trading hub.

India runs trade deficits with Malaysia, Indonesia and Thailand, and we expect these deficits to widen. In fact, Indonesia and Thailand account for most of Asean-6’s trade surplus with India. Meanwhile, India is a net exporter to Vietnam and the Philippines. Its trade balance with Singapore is more volatile, but it has been a net exporter to the city-state for five of the past six years.

Because India runs a larger trade deficit with Asean-6 than China, it actually made a greater contribution to Asean growth in 2009 via trade in goods. Hence, on a net basis, Asean-6 is selling more to India than to China. This is not to dismiss China’s importance — after all, its trade with Asean-6 is still five times larger than India-Asean-6 trade. Instead, it highlights India’s growing importance as a driver of growth in emerging markets.

While financial markets in the emerging world react primarily to China’s economic data, India’s economic performance will play an increasingly important role as Asean countries seek to diversify their growth drivers. While manufacturers in Thailand and Malaysia are worried about the competitive threat of China’s exports, South Asia may offer new opportunities as India seeks to develop its manufacturing industries.

Tai Hui is r egional head of research for Southeast Asia at Standard Chartered Bank.