For the second time in five months, the Shanghai Composite Index saw large corrections this week triggering a newly installed circuit breaker to halt trading on Monday and Thursday.
The downward spiral proceeded to cause a domino effect across world indices, mirroring a similar sell-off that created panic last August over the stability of China’s economic dream run.
Analysts raised concerns about the soundness of the manufacturing behemoth’s economic fundamentals, with many predicting a dramatic slowdown in China’s growth this year.
The slowdown has accompanied a 5 per cent devaluation in the Chinese yuan since August, with both factors expected to continue to weigh down the region’s prospects.
Cambodia in the past few years has been heavily linked to China through massive inflows of investment that are being used to develop the country’s roads and energy infrastructure, as well as Chinese tourist arrivals – one of the biggest blocks of travellers entering the Kingdom.
While the market crash has caused jitters in regional economies, Jayant Menon, lead economist for ADB’s Office for Regional Economic Integration, said China’s underlying real economic situation still remains “uncertain and volatile”, but the devaluation in the yuan suggests things could be “dire”.
“The developments in the stock market are relevant to the extent that they mirror underlying changes in the real side of the economy,” Menon said. “What is clear now is that the situation is likely to be much worse than earlier anticipated.”
It would be premature, Menon said, to anticipate any impact on Cambodia, but tourism and investment flows were the sectors likely to be adversely affected.
“The only question is how big a negative impact it will be,” he added.The World Bank’s “Global Economic Prospect” report released on Thursday highlights the increased interlinking of economies in the region, with growth fluctuations in China, and Japan, expected to have an increased spillover into regional economies.
The report points out that Chinese investors have garment manufacturing, construction and tourism investments in the Kingdom, amounting to a fair amount of exposure to economic tremors from China.
Despite this exposure, the World Bank’s senior country economist Miguel Eduardo Sanchez Martin said the Kingdom is expected to be less affected, compared to other regional economies, by the recent market volatility and Chinese slowdown. He related this to the fact that Cambodia is a not a commodity exporter and capital incipient, thereby shielding it from a reversal in short-term capital flows.
“It is worth noting that, compared to other emerging countries, Cambodia is expected to navigate relatively well this new scenario of slower growth in China,” Sanchez Martin said.
On the investment front, Sanchez Martin said Cambodia should focus on remaining competitive and attractive to Chinese and Japanese investors, given that the country is up against the Trans Pacific Partnership, of which it is not a member, as well as changing bilateral trade preferences.
“For this purpose, cross-cutting improvements aimed at reducing the cost of exports, enhancing the business environment and investing in human capital will be key,” he added.
However, David Van, managing director of business advisory firm Bower Group Asia, said China’s position as a top ranking foreign direct investment source for Cambodia, will result in current projects slowing down, and new projects already in the pipeline being “shelved”.
He added that the property market, which has seen a large amount of Chinese investment, could also be affected.
Another side-effect, Van said, could be costlier raw material imports, given that Cambodia produces little to no materials to support the garment and footwear manufacturing sector.
“Our deficit could also widen because of that effect, since we import more than we export for decades,” Van said.
A pressing issue that needs to be addressed by authorities is Cambodia’s limited capacity to shield itself from external economic shocks, with Yong Sarah Zhou, resident representative of the International Monetary Fund, saying the Kingdom needed pre-emptive policy buffers to build resilience in the economy.
“The policy room to support growth in the face of large external shocks is limited, due to high dollarisation and a lack of monetary control, as well as insufficient fiscal space over the medium term,” Zhou said.
“The policy makers should also ensure continued macro-economic stability through prudent fiscal, monetary and structural policies to support investor confidence and foreign direct investment,” she added.