For decades, rapid economic expansion in China has had a positive spillover effect on the Southeast Asian region, sparking unprecedented economic growth among smaller nations that lifted millions of people out of dire poverty and swelled the ranks of their middle class.

The wealth effect gave impoverished villagers access to benefits Western nations take for granted: better roads, health care and education. Meanwhile, major infrastructure projects such as hydroelectric dams, bridges and airports opened up remote areas where previously only the indigenous and hardy were able to tread.

The long-running, double-digit economic growth enjoyed by China specifically bolstered manufacturing south of the border, resulting in exports to China from the Association of Southeast Asian Nations (ASEAN) surging by about 20% a year for more than two decades. ASEAN comprises ten countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Recently, Southeast Asia further sharpened its clout as a trading bloc with the launch of the Association of Southeast Asian Nations Economic Community (AEC).

But the gravy train could now be screeching to a halt. Fiscal realities are setting in, with China’s GDP growth slowing amid slumping commodity prices, regional currency devaluations and stock market volatility. It is a fall from grace that could threaten the broader region. “China’s growing prominence as a key market for ASEAN exports has increased the vulnerability of many ASEAN countries to China’s economic slowdown,” says Rajiv Biswas, Asia-Pacific chief economist for IHS Global Insight.

Chinese Dominoes

Chinese economic growth slowed to an estimated 6.9% in 2015 and is expected to decelerate further to 6.3% this year, potentially the worst performance since the country’s economy was opened to the global market by leader Deng Xiaoping in the midst of the Cold War. His policies fueled a resources boom that enabled China to transform itself into the world’s factory floor and second largest economy.

China expanded overland routes into Laos, Cambodia, Vietnam, Myanmar and Thailand through heavy investment that incorporated much of Southeast Asia into Chinese supply chains. Annually, ASEAN enjoyed 20% export growth. That growth gave China stature in the region, tempered by caution. However, few seemed to care while so much money was rolling in even as China asserted spurious territorial and maritime sovereign claims.

“China’s growing prominence as a key market for ASEAN exports has increased the vulnerability of many ASEAN countries to China’s economic slowdown.” –Rajiv Biswas

But an economic bubble has been looming, fed by over-construction and soaring debt, and its bursting will have widespread ramifications. “People need to readjust and live with a much lower GDP. In my view, it is unrealistic to expect that China can grow at even 8% or 9% forever,” notes Andreas Vogelsanger, an equities and political analyst with Asia Frontier Capital. “We will probably need to readjust to growth rates of 5% to 6%.”

Chinese government debt figures vary widely, mainly because the central government relies on provincial bureaucrats to report and update figures. But according to consulting firm McKinsey, Chinese debt has grown from a manageable $7 trillion in 2007 to more than $28 trillion today. “China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany,” it noted in a report, before last year’s currency rout.

A sharp deterioration in the Chinese renminbi began in August 2015 with a near 2% devaluation of the currency amid falling commodity prices and then the biggest sell-off the Chinese stock market has ever seen, which has continued into 2016.

As China devalued its currency, Southeast Asian countries were forced to follow suit just to keep their exports competitive, resulting in the biggest falls experienced by regional currencies since the 1997-98 Asian financial crisis that wreaked havoc on government budgets. “The impact of China’s slowdown on the East Asian manufacturing supply chain and both manufacturing and commodity exports has already hit many ASEAN countries hard,” Biswas of IHS notes.

Commodities Hammered

The International Monetary Fund expects the global economy to grow by just 3.6% and recently revised down its ASEAN economic outlook for 2016 to 5% GDP growth, from 5.3%. The figure is an uptick from 4.6% in 2015.

These numbers, however, are paltry by developing world standards and the IMF left open the possibility of further downgrades, arguing growth rates could moderate over the next 12 months due to several factors, including weak commodity prices, political uncertainty and weaker growth in China.

Keith Loveard, a risk-assessment analyst with Jakarta-based Concord Security, notes that substantive differences exist among the 10 countries that make up ASEAN, and their exposure to China varies just as greatly. “The ASEAN economies are tied closely to China, and any major contraction in the market will naturally hurt ASEAN,” he says. “The extent of the dependence of ASEAN economies to the Chinese market clearly varies according to the degree of sophistication of the economy and the capacity to expand trade partnerships.”

ASEAN comprises a mix of nations, ranging from affluent Singapore to the less well-heeled Cambodia and Laos. Religious and political differences are just as great but trade is their all-important common denominator — with commodity-based economies having fared worse. Among them, Indonesia, Malaysia, Vietnam, Brunei and Myanmar have witnessed receipts from oil and gas, palm oil, coal and other commodities dwindle sharply.

The magnitude of the declines, naturally, depends on “the level of exposure, particularly to basic commodities such as iron ore, coal and palm oil,” Loveard says. He adds that Indonesia, the most powerful member of ASEAN, had seen exports in December 2015 decline 17.66% to $11.89 billion, from the same month a year earlier.

“Indonesia is clearly the biggest loser in this equation. It failed to capitalize on the advantages of strong coal sales as China built a dominant steel industry to feed its infrastructure development program, and peak prices in its other major export commodity, palm oil,” he says.

“People need to readjust and live with a much lower GDP. In my view, it is unrealistic to expect that China can grow at even 8% or 9% forever.” –Andreas Vogelsanger

It was a major policy mistake with big ramifications. “While other countries expended effort to develop their manufacturing sectors, Indonesia was content to sit back and reap in the profits from the commodities boom only to see them disappear when China changed course,” Loveard, a veteran Indonesian observer, adds.

Among those to buck the initial trend were Singapore, Malaysia and the Philippines. Malaysia, which had invested heavily in Islamic banking, had weathered the Chinese economic storm until December 2015 when its balance of trade figures showed exports had fallen 2.2% amid a realization that the economy is stagnating.

The Malaysian currency, the ringgit, also took a hit which officials blamed on China while ignoring the political and financial scandals that have enveloped the current administration.

“The still-fragile growth outlook in advanced economies, coupled with downside growth risks from emerging markets, imply further uptick in global demand and hence exports could be very modest,” BIMB Securities, a Malaysian-based Sharia-compliant brokerage firm, states in a report. “We, however, remain hopeful of positive exports growth in the next few months, taking cue from a lower base for oil prices and not forgetting positive lift from the ringgit weakness.”

Economic Contagion

China’s great fall has spread beyond Southeast Asia. Its stock market slide has affected global markets, complicated by an interest rate hike in the U.S. and a descent into negative interest rates in Japan and Europe, with banking and finance stocks taking the biggest hits. Talk of global recession again dominates the headlines.

Singapore’s position as a regional financial hub has protected it to a point. But as a major base for oil-related companies and regional banks, its prospects have also dimmed. Thailand is in a similar position, but analysts explain it would be unfair to simply blame China for the economic malaise when home-grown political issues such as the coup in May 2014 and succession issues surrounding the country’s aging monarch have forced foreign investors to flee.

That exodus prompted its outgoing central bank governor, Prasarn Trairatvorakul, to warn that an erosion of investor confidence has meant Thailand is losing out to Indonesia and Vietnam. “It’s like sitting in boiling water and we don’t feel it.”

To date, only the Philippines has escaped China’s fiscal woes. Its exports are only about half of Indonesia’s and they consist largely of electronic products with the lion’s share going to Japan, thus limiting its exposure to China.

“This rebalancing of the Chinese economy towards private consumption is creating new export opportunities for ASEAN, notably as Chinese tourism has surged.” –Rajiv Biswas

ASEAN’s poorer countries are also faring better. Absolute poverty levels have improved, giving rise to an emerging middle class, even though the gains have escaped the rural poor in Cambodia, Laos and Myanmar. According to the United Nations Development Program, Cambodia’s poverty rate has fallen to 13.5% from more than 40% a decade ago. Myanmar’s poverty rate has improved to 26% while Laos stands at 23%.

Still, ASEAN’s weaker members are not expected to remain unscathed from China’s fluctuating fortunes. As the Vietnamese government has warned, “Any changes in the global economy would have huge impacts on developing countries like Vietnam, Laos, Cambodia and Myanmar.”

Cambodia has accepted more than $11 billion in direct charity and soft loans from China over the last two decades, roughly half its entire peace-time foreign aid budget, while almost half of Myanmar’s $10 billion debt is owed to China.

Whether Beijing’s largesse can continue under current economic stress is the potent question confronting the region’s finance ministries. China has just promised Cambodia it will boost two-way trade by a further $5 billion in 2017.

Beijing cancelled Laos’ debt in 2003, but liabilities racked up since then have not been disclosed. The most pressing issue currently confronting the one-party state is whether to proceed with a massive, but perhaps unrealistic, borrowing spree to fund huge infrastructure programs including nine dams and railways linking Thailand to China and Vietnam across Laos.

The project’s total price tag has been put at more than $20 billion, which dwarf’s Laos’ GDP of about $12 billion, thus fueling outrage among economic conservatives who view it an opportunistic money-grab for acolytes of outgoing Prime Minister Thongsing Thammavong.

“There is little evidence that Laos would gain much from the railway, as much of it would traverse sparsely inhabited regions,” says Gavin Greenwood, a regional risk analyst with Hong Kong-Based Allan & Associates. “While there may be benefits for such sectors as mining close to the line of rail, the overall cost to [Laotian capital] Vientiane would not come close to justifying Laos’ own investment in the project. Indeed, the Asian Development Bank has warned that Laos risks serious economic damage if the project adds greatly, as forecast, to the country’s sovereign debt.”

Thongsing was ousted from power by the Communist Party in January 2016 amid anger within his own ranks over plans to dam the main stream of the Mekong River as well as excessive borrowings. His removal was widely interpreted as a shift away from Chinese influence.

One Road and a Trading Bloc

The impact of China’s decline is being felt wide and deep within Southeast Asia, where governments are increasingly pinning their growth prospects on the AEC, launched on January 1 after decades of planning.

Analysts note that intra-ASEAN trade within the AEC should mitigate some of the fallout between ASEAN and China. The trading bloc includes 625 million people with a combined GDP of $2.4 trillion. As a comparison, India’s GDP stands at $2 trillion and China at $10.4 trillion, according to the World Bank.

However, there is a free flow of skilled labor within the bloc just for eight professions — doctors, nurses, dentists, engineers, architects, surveyors, accountants and those in tourism. Moreover, the bloc does paper over enormous disparities in wealth and standards.

For example, graduates from universities in Myanmar, Cambodia and Laos will find it difficult to compete with their peers in the Philippines, Indonesia and Singapore. Tradesmen and semi-skilled workers, however, will benefit from better cross-border employment prospects on construction sites and in the hotel industry as domestic helpers and laborers, but there will be few tangible benefits for the region’s many unskilled workers.

Nevertheless, intra-ASEAN trade has risen sharply since 1993 when these countries began reducing tariffs, now down by 95%, and harmonizing border regulations as a prelude to the AEC launch. Intra-ASEAN trade now stands at almost $609 billion compared with $82 billion more than two decades ago.

ASEAN, especially its manufacturers, is also hoping to take advantage of a shift in emphasis towards higher domestic consumption and consumerism in China — contributing about 66% to GDP growth in 2015 – with tourism being another prime example.

“This rebalancing of the Chinese economy towards private consumption is creating new export opportunities for ASEAN, notably as Chinese tourism has surged,” Biswas says, noting that Chinese tourist arrivals in Thailand rose 71% in 2014 and in Indonesia by 30% in 2015.

On a second front, Biswas notes that a key long-term growth driver for ASEAN will be China’s “One Belt, One Road” initiative, which will accelerate new infrastructure financing through the recently launched Asian Infrastructure Investment Bank (AIIB) and its Silk Road Fund. Also known as the Silk Road Economic Belt, the One Belt, One Road strategy is designed to open up trade and provide much-needed infrastructure investment across Eurasia. Importantly, this will help soak up excess steel production in China.

“Many countries in Southeast Asia are expected to benefit from the One Belt, One Road initiative, which will help to accelerate the development of the Greater Mekong Subregion as a new global manufacturing hub,” Biswas says. His sentiments are echoed by Vogelsanger at Asia Frontier, who notes that China will remain an important driver of regional growth for many years to come despite the changing economic landscape. “Undoubtedly, the Chinese economy is slowly but surely, by orders from the top, transforming from a cheap manufacturing and export-oriented model to a Western-style consumer-driven society,” he says.

Whether that’s enough to enable ASEAN countries to fulfill their economic dreams and stated goals — Myanmar, Cambodia and Laos want middle-income status by 2030; Vietnam and Malaysia want to be developed nations by 2020 — is tenuous. The picture might be clearer in the coming months.