Asia - aren’t you glad to be here?
The economic recovery began around the second quarter of 2009 for most economies, and Asia’s industrial production index is now back on track, exceeding the peak pre-crisis levels of 2008. This unlike the Eurozone and USA, which took such a shock that their output is still at levels below 2000.
This means that Asia has reached a self-sustaining cycle, without dependency on USA and Europe, and the concerns over decoupling have not materialized because Asia is no longer coupled with the other geographies as they were a decade ago. In fact, Asia now has a virtuous circle of growth, based upon strong domestic demand, which boosts imports and exports, which helps lift personal income and profitability, which creates more domestic demand.
That is why HSBC forecasts year-on-year export growth of 20 %+ in the region, which is crucial to the level of sustainability of a recovery here in Asia.
But how can that level of export growth be the case when you have the mess that’s in the EU and America?
Answer: a lot of increase in demand has just been within Asia.
So we have this old world view of the American consumer being the consumer of last resort, but it has changed. For example, Korea’s electronic shipments to China and China’s shipments of electronics to the USA were closely coupled at the start of the 2000’s. Today, they are not.
Over the last 18 months, Korea’s exports to China have surged significantly but China’s exports to the USA have not. So it does suggest that the Korean products are going to China and staying in china. This is true not just for electronics, but for motor vehicles and more.
In other words, it’s the Chinese who are shopping!
Historically, China has been an export and investment led economy. That isn’t going to change necessarily, but the fact that private consumption as a share of GDP in China is about 36%, it singles the country out from others in the G20, such as the USA where private consumption is over 70% of GDP.
Equally, savings as a percentage of household disposable income has risen to almost 40% in China over the last decade, up from under 30% at the end of the 1990s. That compares to about 3% in the USA.
Why they are saving so much is, according to a survey of citizens by the Central Bank of China, for their child’s education and their own retirement. These are Chinese citizens’ major concerns and the Chinese government are therefore trying to change this mindset to encourage consumerism.
This does not mean a massive swing to USA-style consumerism, but does mean giving more assurance to citizens about education and pensions so that they save less and spend more.
If this does change the mindset of the people of China, then even a few percentage points swing to spending rather than saving will have a massive impact as it will change the habits of 1.4 billion consumers, not just a few million.
This does not mean that Asia does not need the USA and Europe though, and the risks of continued growth or not are related to America and Europe’s issues.
America has delivered better than expected results for the past few quarters, and so there is recovery there.
In Europe, there are different issues and the concerns about Greece are major. But Greece is a small country in Europe, and the contagion kicked off is not necessarily justified as Spain and Italy, which have been caught in this maelstrom, are different to Greece. Spain’s government debt to GDP ratio is half of that of Greece’s, whilst Italy does have a government debt issue but the budget deficit there is half of Greece’s.
The fundamentals are different but, overall, we do expect governments in Europe to increase taxes and reduce spending, with the UK being one of the critical countries to face that challenge.
In summary, Europe as a region may be in continued recession but you have to look to Germany, which stands out and is still motoring forward. Germany’s economy is about ten times the size of Greece’s and is stable. So there are positive indicators in the region along with those negative ones.
Other worries may be things like the end of policy support from governments, which is unlikely; the end of inventory-led growth, which is also unlikely; exchange rate appreciation, but that assumes demand disappears, and we cannot see that happening as Asia is now self-sustaining.,
There are also concerns about an asset-bubble boom and bust in China. For example, seventy Chinese cities saw property prices were up 12% year-on-year and, in Singapore, it is even more marked with private residential prices up 30% in just the last nine months.
In China, you then need to look at GDP growth, which was up 12% in the first quarter and nominal GDP growth for the last year was 15%, so a 12% rise in property prices makes sense.
What about inflation?
Inflationary pressures are showing some signs of issue, as it is growing rapidly with a bigger underlying inflation problem in the region anticipated for 2011. This means that asset price bubbles could develop in a more meaningful way going forward.
The issue here is that many of the Asian central banks are unwilling to tighten interest rate policies, but interest rates will need to be watched and managed carefully in Asia this year if we are to avoid an asset bubble next year.
Remnimbi is also a topical issue, with the Yuan:$ exchange rate pretty well fixed over past few years. The more pressure the USA puts on China to untie that fix, the more likely China will not do anything but we do think that China will appreciate the exchange rate later this year. It won’t be a massive revaluation of the remnimbi, however. It will just be tentative.
This is because China is worried about their exporters and want to avoid any double dip recession within China, so we expect it to be around a 5 percent appreciation of the Yuan against the US$ over the next nine months.
Longer term, our view is that we expect China to overtake the USA economy by 2035.
In other words, China will become the largest economy of the world in 2035, with the USA and Europe closely behind, and India nipping at their heels.
The only thing that can hold this back is that China’s government are showing too much concern right now about a double dip recession and asset price boom domestically, whilst India does have an asset price bubble and inflationary issues.
The Central Bank of China and Reserve Bank of India must get to grips with these issues to realise these dreams.
