>ASIA MACRO VIEW (CITI)

Who Benefits Most From China’s Domestic Demand?

■ Countries best able to latch on to China's resilient domestic demand will likely see a swifter cyclical recovery — While only one quarter of China’s imports from Asia are for its own domestic demand, rather than its exports, the mix varies amongst countries. The extent to which each economy benefits from China’s domestic demand depends on: (i) How closely each individual country’s export mix is geared towards meeting China’s domestic demand, (ii) How important China is as an export market for each country, and (iii) The degree of openness of each economy.

■ Imports from ASEAN are more geared towards China's domestic demand, even though NEA has greater overall export exposure to China — China’s imports from ASEAN, particularly Indonesia and Vietnam, are mostly in commodities and therefore are more strongly oriented towards China’s domestic demand. While China is a more important export market for Korea and Taiwan, almost 80% of China’s imports from these countries are in the export-oriented electronics and/or capital goods sectors.

■ On balance, exports for China’s domestic demand comprise a larger proportion of GDP for Taiwan, Malaysia and Singapore — In all three countries, this is largely a function of the openness of the economy, although for Taiwan this is enhanced by its large export exposure to China (comprising nearly 40% of Taiwan total exports). In addition, Malaysia and Singapore may benefit from commodity exposure (CPO and crude oil for Malaysia, refined oil for Singapore).

■ Greater urgency for Asia to re-orientate exports to support China's domestic demand — (i) While China cannot lift Asia out of recession now, this could change over the next 5-10 years, as we believe China’s GDP could be 50% that of the US by 2014, up from just 25% in 2007. (ii) China’s domestic market is already so large that Asian firms cannot afford to ignore it, with retail sales overtaking Japan from 2007. (iii) China’s evolving comparative advantages, and the increasing localization of the pan-Asian production chain within China, may imply greater competition rather than complementarity vis-à-vis China in export-oriented manufacturing industries. In recent years, China’s imports from ASEAN have seen a greater shift towards
domestic demand-oriented products, due to both higher commodity prices as well as greater competition from China in the manufacturing space.

■ Given the evolving nature of China’s comparative advantages, Asian countries could do well to focus on industries where they have a sustainable comparative advantage — These include consumer services, commodity related sectors, and perhaps niche areas within manufacturing. More broadly perhaps, greater economic integration may be the key for Asian economies to remain viable, not just in the face of greater competition from China, but to become sizeable markets in their own right.

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