China's Weak Demand Hits Factory Output Across Asia

Asia’s factory output dwindled in October with rising prices and weak demand from China caused by persistent Covid restrictions, business surveys showed on Tuesday.

Manufacturing activity shrank in Taiwan, South Korea, and Malaysia, and grew at its slowest rate in almost two years in Japan. India was an outlier with expanding activity as demand remained solid.

“Asia is extremely reliant on China,” chief economist at Dai-ichi Life Research Institute in Tokyo Toru Nishihama said.

“Its zero-Covid policy continues to disrupt supply chains and keep Chinese travellers from returning to Asian tourist destinations. It’s also hurting the region’s exports.”

South Korean Woes

South Korea’s factory activity shrank for a fourth straight month in October as orders for exports fell for an eighth month, the PMI showed.

That followed data that showed South Korea’s exports fell the most in 26 months with shipments to China, its largest market, extending declines.

“Given the country’s open economy and its subsequent reliance on exports, the looming global downturn certainly poses a downside risk for future growth,” Laura Denman, an economist at S&P Global Market Intelligence, said.

Interest Rate Pressure

Further US interest rate hikes are also expected to force most Asian central banks to prevent sharp capital outflows by tightening their own monetary policies, even if it means cooling already soft economies, analysts say.

“Another big risk is the pace of US rate increases. If the Federal Reserve continues to hike rates steadily, that could ignite capital outflows from Asia and hurt exports.”

Highlighting how the pain from soaring material costs and supply constraints outweighed the boost from a weak yen, auto giant Toyota Motor Corp on Tuesday posted a 25% drop in quarterly profit and cut its annual output target.

The International Monetary Fund cut Asia’s economic forecasts as global monetary tightening, rising inflation blamed on the war in Ukraine, and China’s sharp slowdown dampened the region’s recovery prospects.