China won't be able to bail us out this time

As bad as China's economic dive is, the slump is even more perilous for the rest of Asia. The region stands to lose its growth patron.

China's gross domestic product fell 6.8% in the first quarter from a year earlier, the government said Friday, the worst performance since at least 1992. Even before this dismal result, the International Monetary Fund predicted Asia would see zero growth this year.

Even flatlining sounds optimistic when you consider the role China played nursing the region through the Asian financial crisis of 1997-1998 and the Great Recession a decade later. During the former, China was still booming, on its way to becoming the factory of the world and its biggest exporter. Investment was pouring in as membership to the World Trade Organization beckoned. During the global financial crisis, China undertook massive stimulus that buttressed regional activity. The Asia Pacific region eked out an average growth rate of 1.3% during the Asian financial crisis and 4.7% through the Great Recession.

Now Beijing shows little appetite for budget-busting stimulus. Its fiscal steps in response to the pandemic account for about 3% of GDP, according to Bloomberg Economics. That's tiny relative to the 10% and 20% unveiled by Washington and Tokyo, respectively. And while the central bank continues to nudge borrowing costs lower, its steps appear restrained compared with the array of tools being deployed around the world.

What explains this reluctance? China turned to open-slather spending after the global financial crisis. That spree fueled a rebound and buttressed Asia, but it also saddled banks and companies with huge debts. Total debt to GDP, including the financial sector, ballooned to about 300% in 2019 from about 173% in 2008, according to the Institute of International Finance.

All this means the rest of the region can't expect much to trickle through. "China won't bail out Asia this time," Changyong Rhee, director of the IMF's Asia and Pacific Department, said in an interview Thursday on Bloomberg Television.

China may well end up doing more if the recovery scenarios look to be in doubt. The IMF predicts 1.2% growth for the full year, rising to 9.2% in 2021. Keep in mind, too, there's often a lot of padding in stimulus packages elsewhere, with tax incentives and grants included in attention-grabbing headlines. This is particularly true of Japan, where money that hasn't been distributed previously often gets thrown in.

Before the pandemic, China largely succeeded in pulling back some of the practices that fueled its debt buildup, which naturally led to slower growth. But few observers were ready for very low single-digit numbers — the kind not out of place in the US or Europe — to come so soon. Among the scenarios the Organization for Economic Cooperation and Development sketched out for the world in 2060 was the prospect that growth rates in the US and China would start converging in 2030, averaging at just under 2% a year. The report was written in 2018. The coronavirus will only bring forward this outcome.

China's transformation over the past four decades from Mao-era basket case to the world's second-largest economy has been a vital ingredient in Asia's rise, especially after Japan's ascent stalled in the early 1990s. To say the Covid-19 pandemic halted this in its tracks is an understatement. China's future has arrived, and Asia will be the weaker for it.

Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.