A long-standing theme of our research has been that the United States simply doesn’t matter that much anymore to Asia’s growth fortunes. That Asia itself, after 45-50 years of rapid growth, has become large enough to generate its own domestic demand and thus to drive its own growth.

Of course it didn’t come from nowhere. Most of it came from China. How much? Put it this way: in those four years that the US, Japan and the eurozone went nowhere, Asia “added” an entire Germany, right here in Asia. China accounted for 70 percent of that addition.

This immediately begs the question if China is now the driver of Asian global growth, isn’t it the new risk as well? Our answer all along has been: absolutely — new drivers, new risks. If you used to keep two eyes on the US, one and a half of them should now be trained on Asia/China.

In the past 18 months, that fact has come home to roost. China has slowed considerably. Double digit growth  dropped to 9.5 percent in 2010 and 2011 and further to 7.6 percent, on average, since early-2012. Many have wondered about the risk of a “hard landing” — an event that would, by definition, have severe repercussions across the region.

The good news is a hard landing seems ever more unlikely as time goes by.

Not only has growth run at 7.6 percent for five consecutive quarters, but much of the slowdown has been intentionally engineered, as the new leadership clears the decks and overhauls the engines for the next growth phase.

The bad news is most of the slowdown seems likely to be permanent.

The government has set a 7.5 percent growth target for the next five years and the new leadership seems perfectly pleased with the 7.6 percent growth that has prevailed since mid-2012.

Focus on reform

Late last month, as markets and media fretted whether growth might be getting “too” slow, the government ordered 1,400 companies in 19 industries to cut capacity expansion plans to make way for other (not necessarily new) industries being opened up to private investment and competition. The focus is firmly on reform and restructuring, not short-term cyclical growth fuelled by fiscal and monetary stimulus.

How will China’s slower growth affect the rest of Asia? Perhaps less than one might think. This is because any country’s growth potential is more of a supply side issue than a demand side issue. South Korea, for example, might max out at a 4 percent rate of GDP growth, given its population growth, technological level, productivity growth, resources and so on.

More demand from China, or anywhere, might give South Korea a temporary and cyclical boost but it can’t raise South Korea’s growth above 4 percent for very long. Conversely, less demand from China shouldn’t lower South Korea’s potential either. This is important to keep in mind when one considers what a slower China means for the region. The medium-term impact is likely to be far less than the short-term impact.

In the short run, though, a slower China means a slower Asia. How could it not?

Even at today’s knocked-down 7.5 percent growth pace, China “adds” an entire South Korea to its economy every 2 years. It adds a Singapore every 5 months. Last year, the growth in just China’s investment was one-third more than all the GDP growth in all the other Asia-10 countries combined! Changes in this kind of demand growth have to have an impact on the region and they already are.

Who in Asia is vulnerable to the changes underway in China? Everyone — from Hong Kong to Taiwan; from South Korea to Singapore, to the electronics and commodities producing countries of Thailand, Malaysia and Indonesia — all will feel the changes. We take a brief look at two important areas here: trade and tourism.

Asia’s exports to China have soared over the past 10-12 years and, as we now know, China wasn’t just flipping them off to the “developed world” it was the final destination for most of them.

But new drivers means new risks. Asia-8 exports to China have slowed sharply over the past two years and the impact isn’t shared equally.

South Korea has a quarter of its exports headed for China, more than double the share of a decade ago. Japan’s exposure to China has tripled since 2000, with nearly a fifth of its exports now headed there. Thailand, Malaysia, Singapore and Indonesia are relatively less exposed, with 12-13 percent of total exports headed for China. India’s links remain low, with only 5 percent of its exports headed for China. Similar shares prevail for the US and Europe.

Higher incomes have led to a boom in Chinese tourism abroad, raising revenues throughout Asia. Here too, slower growth will have an impact.

After Hong Kong, Thailand and Taiwan seem likely to be impacted the most. Taiwan, because most (35 percent) of its tourists come from China’s mainland and Thailand, because tourism is relatively more important to its economy.

Next come Singapore and South Korea, with broadly similar exposures. Malaysia gains much from tourism (7 percent direct contribution to GDP) but it’s not a popular destination for Chinese mainlanders and the impact of a slower China on tourism revenues is relatively low. Ditto for Indonesia, the Philippines and especially India. A note of caution or, rather, reassurance is due here. China’s incomes are still going up and tourism is too. As our analysis of Thailand shows, falling growth in China hasn’t stopped a surge in tourist arrivals there from the mainland.

Fundamental problem

Nothing’s guaranteed in economics and structural change is riskier business than most. What if you move this beam but that beam won’t budge? What if you tear down this industry but that one won’t grow? What if you move 100 million people into urban areas and they don’t like the view? Or their neighbors? Or their jobs? What then?

The problem is as fundamental as it clear. Structural change requires a lot of government planning. What makes this government think it can plan any better than its predecessors could?

In this light, one can imagine short-term risks and long-term risks. Longer-term, the key risk must surely be that structural change turns out to be more difficult to carry off than everyone hopes. China today is 30 times larger than it was back in 1978. In a very real sense, that makes structural change today 30 times harder to effect than it was back then.

Short-term risks are more tangible. One of the key changes the government is pushing is to make consumption a bigger driver of GDP growth at the expense of exports and investment.

Growth in both investment and exports has fallen significantly in 2011 and 2012, especially investment. The key risk in the short-term is that consumption cannot fill the gap left by investment and exports and that cyclical growth drops below even recent norms of 7.5 percent.

What makes this risk especially thorny is that another key objective is to lessen the role of state-owned enterprises in the economy. This is positive but it takes away the quick-switch mechanism the government once had to control short-term growth. If authorities miscalculate now, there is nothing to fall back upon.

At the end of the day, the biggest risk lies in doing nothing. The economic “facts of life” mean that China has little choice but to change or stagnate.

If its track record of economic planning was dismal, its track record in delivering 10 percent annual GDP growth since 1978 is unsurpassed in history.

Ten percent growth won’t continue. But most market observers, including DBS, expect that China to achieve 7.5-8 percent growth for the remainder of the decade, if not for a bit longer. And even at this rate, Asia, with China at its center, will still be adding a whole Germany to its economy every 3.5 years.