Managing expectations: Container terminal in the port of Dalian, China
|Managing expectations: Container
terminal in the port of Dalian, China
To many, Asia represents the saving hope for the world economy.
The regions economies have vastly outpaced those of the
debt-burdened west, bouncing back with enviable vigour
following the global crisis. Financiers are now betting that,
thanks to Asias resilience, the global economy will
withstand another slump in the west.
Inventory restocking, fiscal stimulus and a pick-up in
exports, albeit from a low base, have boosted growth across the
region in recent quarters. The Asian Development Bank now
predicts Asia will grow 8.2% this year, revising its 7.5%
forecast in April.
But amid the euphoria over the regions seemingly
unstoppable rise, a growing number of experts is sounding the
alarm. For a start, they point out that the collapse in western
demand in 2008 led swiftly to a precipitous drop in Asian
exports a fact laid bare the deficiencies of the
regions growth model. This model where growth
depends principally on exports has barely changed post
Asian countries should pursue another development
model based on domestic demand and regional demand, rather than
external demand, particularly markets in the US and
Europe, Asian Development Bank president Haruhiko Kuroda
said recently. Given subdues demand in the west, Asia as
a whole cannot expect such rapid growth in exports for
the foreseeable future, he said.
But the worry is that Asias policymakers are still
clinging to the belief there is no need for adjustment
that the region can return to the pre-crisis dependence on
exports as the primary growth engine, a strategy that has
served the region so well in the past.
The general mentality is that we will pick up where we
left off, says Michael Spencer, Deutsche Banks
chief economist from Asia. I doubt that will
For many countries in Asia, this was the most severe,
the sharpest recession ever experienced, he says.
It was fairly short but that doesnt mean that
everything just returns to what it was and we live happily ever
Most policymakers havent woken up yet. They are
just kidding themselves if they think its business as
usual, that this was just a blip and things will go back to the
export boom before 2008. The demand isnt there. Its
a new reality and will be so for longer than they care to
Jonathan Anderson, UBS chief emerging markets
economist, expresses a similar sentiment: There is a
palpable sense of complacency in Asia and a rather
disturbing air of self-congratulation. After the 2008 financial
crisis, policymakers have been high-fiving each other that
their economies didnt fall apart.
NEW MODEL NEEDED
Whats required now is a sea change in policy, analysts
say. Following the Asia crisis, authorities looked to a
jumpstart a capital exporting model, which relied on export-led
growth supported by undervalued currencies and external trade
surpluses. Investment concentrated on tradeable goods rather
than domestic consumption. Meanwhile, Asian central centrals
stockpiled vast quantities of foreign exchange reserves
principally through buying trillions of dollars of low-yielding
US Treasury bills to prevent their currencies from
China is the most explicit example of this model, but fixing
exchange rates to support export competitiveness remains
widespread across much of southeast Asia. Notable exceptions
are India and Indonesia, which benefit from thriving domestic
Despite the ADBs optimistic forecasts for Asia as a
while, the bank says Chinas average annual growth rate
could halve over the next two decades as investment wanes. It
projects 5.5% annual Chinese growth for the 20 years to 2030,
compared with 9.% between 1981 and 2007 and a forecast 9.6%
Chinese policymakers have long talked of the need to
rebalance growth away from exports and towards private
consumption. But so far the ability of China to increase
domestic private demand and rely less on net exports
has been severely limited. Weakness in net exports at a
time when domestic private demand cannot grow fast enough is
also likely to limit Chinas economic recovery.
For China, economic rebalancing very specifically
means raising the GDP share of household consumption from its
astonishing low level of 36%, says Michael Pettis is a
finance professor at Peking University . Low household
consumption is mainly caused by the very low GDP share of
Chinese household income, so the key to rebalancing is to get
household income in China to rise faster than GDP.
ADB chief economist Jong-Wha Lee has pointed out that
rebalancing growth demands a judicious mix of
policies to build strong domestic demand and apply
resources more efficiently. They include: a focus on
strengthening domestic consumption; improving the investment
climate and social infrastructure; accelerating financial
development; and strengthening regional integration and
But while talk of such a deeper structural shift is now
commonplace, putting theory into practice is less
Still, a growing number of Asian economic policymakers are
pointing their countries toward China. In Jakarta, Gita
Wirjawan, the cabinet-level chair of Indonesias National
Investment Development Board and former head of JP Morgan in
the country has spent his first year in office shuttling to
Beijing to see how the two countries can work together.
Corruption, Indonesias long-time impediment, isnt
so much the issue, Wirjawan says. Its more being able to
guarantee supply of materiel to feed the insatiable China
This year we are embarking on a massive infrastructure
drive, Wirjawan tells Emerging Markets. We have the
things that China wants, and we have them cheaper than other
places China does business with. We need to be able to get them
out of the ground and to the ports more
In the short-term, Asian economies, principally China, face
overheating risks following unprecedented pump priming to
compensate for the slack in external and domestic demand.
Chinas $600 billion economic stimulus programme in 2008,
designed to head off trade shocks in the wake of the subprime
crisis, has left something of a hangover.
In some respects, says Deutsches Spencer, the package
seems to have worked too well: Chinas economy roared back
amid a surge in credit, but Beijing has since been forced to
pare back some of the excess tightening regulation and
raising interest rates to curb lending as fears grow
over a bubble in an already-overheated property market.
Yet financial markets by and large dismiss such fears. Tim
Condon, Asia chief economist for ING Bank, says: The
signs say soft landing in China. Asia, in general, is in pretty
good shape. If anything, significant economies here are
under-performing. Its not as if China is going into
recession. We are talking high single-digit growth and the
policymakers seem to have it in hand.
Huge swathes of investors are betting that Asia is both
insulated from a drop in US economic output and successfully
making concerted efforts to find new sources of demand. At
Aberdeen Asset Management, Bangkok-based economist Ratanawan
Saengkitikomol says that Asia could withstand another economic
downturn in the West.
A G-8 double-dip recession would certainly impact
headline Asian growth, she says. But Asian trade
surpluses have been falling, reflecting the fact that Asian
domestic demand is growing faster than external demand. It
shows that Asian economies are becoming less dependent on the
Ratanawan says that hardier fundamentals underpinning Asian
economies are leading to a sharp V-shaped recovery that
investors should heed.
Condon looks to South Korea, arguably Asias most
export-dependent economy, as a case in point. Korea, the
worlds 12th-biggest exporter, Condon says, is a
solid single-A credit economy.
Its performance in the face of turmoil among its major
trading partners has been impressive. Despite exports slumping
by 18% in the first quarter of 2009 when GDP growth hovered
around zero, Korea jumped back to solid growth in the following
quarter. It has done relatively well since, despite
(inaccurate) forecasts from the government and central bank
that its economy would contract for the first time since the
regions financial crisis in 1998.
The Bank of Korea continues to keep rates near record lows
(2%-2.25%) and the IMF has lifted its GDP forecast for 2010
from 5.7% to 6.1%. Condon says Korea is not China but,
nevertheless, is set to join the worlds major
Perhaps unique in Asia, Indias economy is expanding at
a fast clip more or less irrespective of China. A recent survey
of the regions economists by Reuters forecast India would
grow by 8.4-8.5% through 2010 to 2012, up from 7.4% in
2009-2010, mostly thanks to rampant consumer demand at
Condon likes the India story, which is unusual to much of
Asia in that expansion is more bottom up than top down; that
is, driven more by domestic consumption and investment.
Its one of the most exciting economies in the
world, he said.
Across ASEAN, Condon describes Indonesia as an
underperformer. South-east Asias biggest
economy runs along at 5.5-6.5% growth, which is the level the
government is required to sustain jobs. Condon says: It
is as if they have imposed a speed limit. I dont see any
reason why Indonesia cant bump growth up to 8%-9%, spend
some money on their infrastructure and emphasise the
non-manufacturing side of the economy.