December 2020

Decoupling of economies
affects Asian tradedevelopments
Atradius Regional Economic Outlook

Atradius Economic Research
Bert Burger

bert.burger@atradius.com+31 (0)20 553 2872

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Executive summary
The Covid-19 pandemic and the ongoing trade war made 2020 an ‘annus horribilis’ for the world economy. For Asia,
it was less so. The recession in most economies was less severe than in the rest of the world, due to successful
containment measures and firm fiscal and monetary policies. Both factors will also play a role in the growth
opportunities (which are reasonably good) for the region in 2021.
The initiated growth recovery is positive for foreign trade, but economic policies pursued by China and the new US
administration have an impact as well. A gradual decoupling of economies, changing supply chains and free-trade
initiatives will have both positive and negative consequences for foreign trade developments in Asia. On balance, we
expect a promising year, but with some pitfalls.

Key points
 Economic recovery has started in most Asian countries, with underlying growth strongest in Vietnam and China. India has
the weakest starting position.
 Thailand, Malaysia and China have supported their economies with more fiscal stimulus than other countries in the region.
However, the Chinese authorities will restrain themselves now, in order to avoid a further increase of macro leverage.
 The new Five-Year-Plan means China will focus even more on domestic, consumer-led growth than before, and less onexports. Despite the external pillar in the ‘dual circulation’ strategy, China’s aim to be less reliant on foreign technology andbetter equipped to external shocks will strengthen the international trend of decoupling of economies.
 With a new administration, the US will maintain a tough approach to China, albeit one that is more predictable and lessconfrontational. By working together with the EU, Japan and other allies, the Biden administration – avoiding the Trumpadministration’s confrontational attitude – will probably be more successful in persuading China to introduce changes intrade, competition and other relevant areas.
 Regional supply chains are changing because of rising wage costs in China and changing trade policies. Covid-19 willprobably accelerate this process, because dependence on only one country has proven problematic. Based on relative
attractiveness, Vietnam, Malaysia and Singapore stand out as the countries best positioned, but in different sectors.

A gradual decoupling of economies
An ‘annus horribilis’ for theworld economy
The year 2020 has been an ‘annus horribilis’ for the global
economy in several respects. The Covid-19 pandemic swept
the planet like a shock wave, while the ongoing US-China
trade war continued negatively impacting international
trade. Asia1 could not escape the negative shock, which hit its
economies as hard as it came unexpected. Lockdowns andother measures took their toll on consumer expenditures andcorporate investments, while remittances - an importantsource of income for several countries in the region –decreased sharply. Exports, which were under pressure
already before the pandemic, fell across the board. The
Philippines and Thailand saw a collapse of tourism.
1.1 Philippines and Thailand most hit by collapsing tourism
Tourism, direct and indirect % of GDP
Philippines
Thailand
Malaysia
China
VietnamIndia
Indonesia
South Korea

Philippines were exceptions among the major economies in
the region. In India, a stringent national lockdown and aprolonged first wave exacerbated the significant headwindsthat already had a negative impact on growth prior the
pandemic. In the Philippines, the authorities also battled
relatively long to contain the rise in Covid-19 infections.

A multi-speed growth recovery
The prospects for 2021 are positive. This is not only because
the Covid-19 virus will probably be contained by the
introduction of vaccines, albeit only in the course of the year.
A return to full capacity will take a longer time because fearof infection and social distancing measures still put a brakeon consumer spending. Travel restrictions will continue todampen tourism next year, and goods exports still will feelthe impact of weak demand from developed economies. The
economic outlook depends on infection rates, containment
measures and the policy response by governments andcentral banks. Differences between the various countries willlead to a multi-speed growth recovery in Asia. Although, likein 2020, the overall picture will be better than elsewhere in
the world.
1.2 Asia shows a relatively strong growth performance

0

5

10

15

20

25

30

8

Real GDP growth, % year-on-year

6

Source: Oxford Economics, Atradius

4

Asia is less affected
While the region has been negatively affected, it has
performed well compared to other regions. World GDP is
expected to decrease by 4.2% in 2020 and to bounce back by
4.9% in 2021, while in Asia, economic activity is forecast tocontract only 1.3% this year and to rebound about 6.5% in
2021. While there was a recession in the countries covered inthis report, it was short and not as deep as in the rest of theworld. China, the first victim of the virus outbreak,experienced its first quarter-on-quarter GDP contraction in
many decades already in the first three months of the year,
but saw thereafter a gradual recovery. For the othercountries, the recovery started in the third quarter, after
their economies hit the bottom in Q2. India and the

2
0
-2
-4
-6
World

Developed Markets
2019

Emerging Markets
2020

Asia
2021

Source: Oxford Economics, Atradius

The Atradius Regional Outlook Asia covers Asia, excluding Central
Asia, the Middle East and Japan. The focus is on China, India, South
Korea, Indonesia, Thailand, Philippines, Malaysia and Vietnam.
1

Atradius Regional Report Asia – December 2020 | 1

Covid-19 not an obstacle for further
economic recovery
Looking at the infection rates and containment measures,
Asia is well positioned to rebound. According to data fromthe Johns Hopkins Coronavirus Resource Center as of 22nd
November, Vietnam, Thailand and China rank among thelowest eight out of 170 countries concerning deceased per
million inhabitants – much lower than countries in Europe
and the Americas. South Korea and Malaysia have also
registered much lower death rates, ranking only 145th and143th respectively, with only roughly one tenth of the numberof victims of many developed economies. Indonesia, thePhilippines and India are performing worse, but still rank
only 99th, 90th and 82nd. Evidently, the virus itself will not be
an obstacle for further recovery of Asian economies. At firstglance, it is remarkable that India and the Philippines are
expected to have the highest growth rates next year, but thiscan be explained by the fact that they are inflated by the low
growth base in 2020 and related pent-up demand.
Underlying growth is strongest in countries that performed
relatively well in 2020, such as Vietnam and China.
1.3 Covid-19 took its toll, but economic recovery has begun
15

Real GDP growth, % year-on-year

10
50

The picture is diverse for fiscal policy as well. In terms ofadditional spending and forgone revenue, Thailand, China
and Malaysia have implemented the largest fiscal stimulus inemerging Asia so far. Thailand has announced to ramp up
fiscal stimulus with an additional 14% to 15% of GDP in 2021.
Malaysia’s government will be even more expansionary nextyear, with fiscal measures totalling around 21% GDP, on topof current wage subsidies, cash handouts and othermeasures to support recovery.
The Chinese authorities, however, will restrain themselves inorder to avoid a further increase of macro leverage. Local
government bond issuance, which gave an impetus to
growth earlier this year, is set to decrease. With about 55% ofGDP, government debt is not overly high, but so-called‘augmented debt’, which includes the central government,
local governments and their financing vehicles, as well asother off-budget activities, is at a worrying level. It amounts
to 85% of GDP according to the IMF’s most recent pre-Covid19 forecast, and probably more than 100% at the end of thisyear. Even more worrying is the huge debt pile of nonfinancial corporates (at about 160% of GDP), as these containcontingent liabilities. Household debt is lower but steadilyrising to almost 60% of GDP. The risk of a systemic financial
crisis is low, as debt is mainly financed domestically. Yet arenewed pick-up in credit growth could eventually lead tomore pronounced financial stress, raising the risks ofdefaults and market turmoil in the coming years.
1.4 Divergent fiscal response to Covid-19 in first nine months of
2020
10

-10
-15

2019

2020

2021

Source: Oxford Economics, AtradiusFiscal and monetary response varies
from country to country
The economic outlook for individual countries also differs
due to divergent fiscal and monetary measures. Relevant formonetary policy, across the board output gaps are large, with
low inflation pressures. This provides leeway for some
additional policy rate cuts (Malaysia), for measures toenhance monetary policy transmission channels andliquidity support (Indonesia and Thailand), or at least
enables to stick to an already accommodative monetary
policy stance (China, South Korea and the Philippines). With
inflation remaining below target, Vietnam also has room tolower interest rates, but it can afford to wait because
economic activity is picking up relatively fast. India is the
exception, with upward price pressure limiting the room formonetary easing. Some further rate cuts are likely, but a lackof adequate recapitalisation of public-sector banks in theface of pre-existing credit strains will limit banks' ability tolend adequately to the private sector.

Total fiscal spending on Covid-19 % of GDP-5

8

Thailand6
China

Malaysia

4
VietnamSouth Korea

Indonesia
2

Maldives
India

Philippines
Laos

0
20

40

60

Sri Lanka
80

100

Total government debt 2019 % of GDP

Source: IMF (September 2020), AtradiusIndonesia and the Philippines, both belonging to the fiscallymore cautious countries in the region, have less room for
additional stimulus packages. In Indonesia, the fiscal deficit
has risen to 7% of GDP this year, and will remain at nearly 6%
in 2021, despite the growth recovery. These figures stirred
some debt sustainability concerns earlier this year, but the
public-debt-to-GDP ratio will only reach a still manageable
40% before decreasing again next year. The Philippines alsosees its fiscal deficit widening sharply, whereas the debt
level will remain sustainable. However, in contrast to
Indonesia, the authorities of the Philippines have had
problems implementing the fiscal stimulus, which added to
the weak growth picture this year. In India, fiscal spending
related to Covid-19 has also been relatively low, and this willcontinue in 2021. The government will probably launchanother fiscal package, including an infrastructuredevelopment programme. However, over the course of next
Atradius Regional Report Asia – December 2020 | 2

year, it will gradually take care to consolidate the publicfinances because of the high debt-to-GDP ratio.

New policies add to decouplingof economies
Besides Covid-19 and fiscal and monetary measures,
economic policies in China and the strained relationshipbetween Washington DC and Beijing will have an impact on
the economic and foreign trade outlook for Asia. Important
here is to what extent China’s new Five-Year Plan and the US
president-elect’s policy intentions contribute to a decouplingof the US and Chinese economies.

China: dual circulation withemphasis on technological selfrelianceTechnological self-reliance, ‘dual circulation’ and a move to asustainable and resilient economy are the key aspects ofChina’s 14th Five-Year-Plan (FYP), of which an initial draft
has been released end of October. Although the FYP does notmake explicit references to it, it is clearly the intention of theChinese Communist Party to reduce China´s dependence onother countries, especially the US. In a move to higher
quality growth, the FYP puts strong emphasis on
strengthening innovative capacity in the strategic fields of
5G, the ‘internet of things’ and cloud computing.
Next to reducing reliance on foreign technology, the FYP
makes clear that China will pursue a gradual shift fromexport-oriented towards consumption-based economic
growth, which already started more than ten years ago. The
dual circulation concept, which is a key theme in the FYP, isabout improving the domestic circulation of demand andsupply with the intention to make the Chinese economy
more immune against shocks, while at the same time going
forward with market-oriented reforms and opening up. The
domestic pillar, however, is dominant, whereas the external
pillar is meant to reinforce the domestic growth strategy byattracting foreign direct investments (FDI) and portfolio
inflows.
The Covid-19 pandemic is already contributing to the shift
towards more domestic-led growth. China has been able tostart the economic recovery in a period of still weak external
demand. Even more importantly, the shift to domestic
growth is reinforced by the US and other countries which
aim to reduce their reliance on China. Following US
restrictions on exports of high-tech products and direct
investments to and from China, the UK, Australia and several
EU countries have taken steps to block Huawei, fully or
partially, from playing a role in their domestic 5G networks.
Japan uses a subsidy scheme to encourage companies tomove production away from China back to Japan or to othercountries. For India, recent military skirmishes at theHimalayan border are a reason to introduce trade andinvestment restrictions on Chinese companies. The Covid-19
pandemic spurred European policymakers to recommend a

reduction of the medical equipment sector’s reliance on
China by increasing onshore production. Therefore, adecoupling of China from a range of countries has set in. It isa gradual trend, and as long as many multinational
companies are keen on having access to the huge Chinese
consumer market, it will be only a partial decoupling.
However, after a long period of globalisation in which thetransfer of technology and know-how via trade andinvestment has been beneficial for China’s productivity and
GDP growth, further decoupling will probably reduce thesegrowth rates.

New US administration: still a firm
stance on China, but lessconfrontational
It is expected that Joe Biden’s election as president of theUnited States will lead to some major changes in foreign
relations. Currently, it seems that US foreign and economic
policies will be more predictable, less confrontational andfocused on re-establishing ties with established allies such as
the EU, Canada and Japan. During his presentation ofcandidates for various posts end of November, the presidentelect indicated that he is strongly committed to multilateral
cooperation. In addition to re-joining the Paris climateagreement and expressing renewed support for the World
Health Organisation, the new administration is expected topursue a multilateral approach, seeking closer cooperation
with its allies on a common China policy. Like the US,
Australia, Japan and the EU are increasingly concerned
about China´s growing military and economic might, as well
as about Beijing´s more assertive policies. Businesses haveincreasingly complained about unfair competition from
Chinese state-owned companies and forced sharing oftechnological knowledge with Chinese partners. To achieve alevel playing field in international trade and business, the US
will not soften its currently determined approach in its
relation with China, which has broad support among both
Republicans and Democrats in Congress. However, the newadministration will probably make less use of punitive
tariffs as a bargaining chip. By practicing closer cooperation
with its allies, the Biden administration will probably bemore successful than the Trump administration in
persuading China to change its policies on trade, competitionand other issues.
While it will likely take longer for a revised China policy tobear fruit, the benefits of a multilateral approach and the endof trade wars will be favourable for international and Asian
trade in the short term. Less uncertainty for companies about
tariffs and sanctions - not only against China, but also
against other countries - will have a positive impact on
businesses’ appetite to invest, both domestically and abroad.
Some of the US trade restrictions affecting Asian countries
may be rolled back, and a reinstatement of Indian and Thai
exports under the US Generalised System of Preferences(GSP) is possible. Although the direct impact of unwinding
the protectionist measures would be modest, it will bepositive for business confidence.
Atradius Regional Report Asia – December 2020 | 3

Even more important could be that Biden is in favour of freetrade agreements. His election victory revives the hope for apotential re-joining of the Trans-Pacific Partnership (TPP),
the trade agreement from which Trump withdrew even
before it went into play. The remaining group of elevencountries (of which five are Asian countries, but not China),
which in 2018 still started with the Comprehensive andProgressive Agreement for Trans-Pacific Partnership(CPTPP), would likely welcome the US. US participation in
CPTPP would be of strategic importance, serving as acounterweight against the RCEP (the Regional
Comprehensive Economic Partnership), which started
November 15th, after eight years of difficult negotiations.
With 15 countries including China (but not India), and abouta third of global economic activity, RCEP is the world’s
biggest trade agreement. However, it is less ambitious than
CPTPP regarding coverage of areas such as environmental
and labour standards, as well as rules for state-owned
enterprises. RCEP is mainly focused on tariffs andrudimentary trade-facilitation measures.
Despite a likely less confrontational US-China policy and apotential CPTPP re-entry, the trade and technology
decoupling of the US and Chinese economies will graduallycontinue in the coming years.

Covid-19 accelerating supply
chain changes
The trend of decoupling, kept going by both Chinese dual
circulation and trade policies of the US and other countries,
has implications for the rest of the region. Most important isthat companies will adjust their supply chains by relocatingproduction. For example, the US is using tax incentives toencourage US companies to reduce their supply-chain
reliance on China and to relocate production to the US.
However, more often it will mean that US imports deflectedfrom China will be produced in other Asian countries. For
other countries that are encouraging companies to diversify
away from China, this will be the case as well.
A temporary phenomenon, but probably with a lasting
impact on changing supply chains, is Covid-19. Apart fromthe protectionist tendency in global trade over the last coupleof years, stringent lockdowns and other containment
measures in China early this year made international
companies aware how dependent they were on one single
country. OECD data shows that in one third of countries
worldwide, the share of imports of intermediate products
from China is more than 15% of total intermediate productimports. These countries – especially the US, Mexico andseven Asian countries that have a share above 20% – arevulnerable to supply chain disruption. The interruption in
the supply of intermediate goods from China in early 2020
led to worldwide problems in the car industry, the pharma
sector and in electronics manufacturing. This awareness willprobably accelerate the change of supply chains in East andSoutheast Asia, but it will not go quickly and will be only
partial. Many companies are not only producing for the US
and other Western markets, but also for Chinese buyers, andtherefore have an incentive to keep production there.
Capacity restraints are also putting a brake on moving
supply chains to other locations in the region, because of
China’s large production size and the fact that several
countries do not have the required infrastructure or labour
supply. Diversification within supply chains, however, willtake place, with companies moving specific operations (butnot entire supply chains) to another country.
1.5 Countries relatively most reliant on China for intermediate
goods
Share of intermediate goods imports from China in total intermediate imports (%)
Cambodia
VietnamSouth Korea
Hong Kong
Malaysia
Thailand
MexicoUnited StatesIndonesia
0

10

20

30

40

Source: OECD TiVA, Atradius

Changing supply chains beneficial
for Vietnam, Malaysia andSingapore
A more traditional but still important cause for supply chain
change is rising wage costs in China and growing
attractiveness of other countries in the region. In fact, wage
costs in China still are much lower than e.g. Australia andSouth Korea. But they are rising quickly, making it attractive
to shift low-skilled manufacturing out of China towards
lesser-developed economies in the region. This shift, as
mentioned above, will accelerate in the coming years by
China’s aim to create high-quality growth. Bangladesh andCambodia stand out as countries able to raise their share of
global production of textile and textile products, also because
they are already producing for the biggest clothingcompanies in the world. However, Vietnam is most often thedestination of companies relocating parts of the supply chainout of China. Besides low wage costs, the country benefits
from its participation in several trade agreements (CPTPP,
RCEP and a recent EU-Vietnam trade agreement) andpolicies favouring incoming foreign direct investments. Theease of doing business, for which Vietnam traditionally wasranking relatively poorly, is improving. With the US as themain destination, its exports of telephones and telecom
equipment and consumer electronics are growing, whereas
textiles and garments exports see a declining share of totalexports.

Atradius Regional Report Asia – December 2020 | 4

1.6 China’s wage costs are low, but in Vietnam much lower
Average annual wage manufacturing sector (USD)

50000
45000

1.7 Good prospects for exports growth, with Vietnam standingout
20

Export growth, % year-on-year

15

40000

10

35000

5

30000

0

25000
20000

-5

15000

-10

10000

-15

5000

-20

0

-25

Source: JETRO Survey 2019, Atradius

Another country benefitting from supply chain adjustment is
Malaysia. Its wage costs level is comparable with China’s, but
due to labour-force skills Malaysia’s production capacity inmedium skilled electronic manufacturing is rising. Besides
that, the country is performing relatively well regarding
quality of infrastructure and ease of doing business.

2019

2020

2021

Source: Oxford Economics, Atradius

Illustrative of the fact that not only wage costs are importantis that Singapore is a large recipient of FDI inflows to its
financial sector. This is supported by the troubled situationin Hong Kong. Political unrest in the Chinese Special
Administrative Region has decreased this year, but protests
could easily flare up again once the inhibiting effects of
Covid-19 abate. Hong Kong´s economic outlook for next year
is quite good with further recovery in store. However, theongoing trade war and, in particular, an end of US
preferential treatment for Hong Kong relative to China,
threaten its role as a financial and trade hub. Hong Kong willremain a key gateway in and out of China, especially in thefinancial realm, but probably not as prominently as before.

Atradius Regional Report Asia – December 2020 | 5

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