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Asia decoupling? Not any time soon!
25-11-2009
ATI ASIA2010 Magazine
WASHINGTON – Rob Cardarelli is somewhat bemused by claims that Asia is decoupling from the United States and other advanced economies. The current mantra is that China will be the growth engine for Asia, and indeed the world. But sceptics say China is a long way from being ready to take on that role, because it means offsetting the collapse of demand from the United States.
“We don’t believe that Asia can grow independently. Very simply put, we believe the stories of decoupling are misplaced,” says Cardarelli, who is Chief of the Regional Studies Unit at the International Monetary Fund (IMF) in Washington.
Cardarelli’s view is echoed by many in the US, who cannot believe that Asia, which is so wedded to its export-led development strategy, is about to change all that – now, or in the foreseeable future. As they see it, Asia’s mercantilism is simply not negotiable.
Leading economic commentator Clyde Prestowitz also doubts that Asia can generate its own growth, or that China will be able to provide the lead for the rest of Asia to grow.
A long-time student of Asian economies, Prestowitz says the whole of Asia, including Japan, has been organised for export. “Why does anyone believe that it will suddenly change its organisation?” he asks.
Prestowitz recalls a conversation with a former Prime Minister of Singapore. When asked why Singapore had had to have a trade surplus year-after-year for the past 25 years, the former PM’s answer was categoric. There would always be a trade surplus. It was just another confirmation to Prestowitz that, for Singapore, South Korean, Japan, China and Japan, the national goal is to achieve a trade surplus.
“I was on a panel with CEOs in Hong Kong recently,” says Prestowitz. “The CEO of a company which makes semi-conductors in China made the observation that China does not have the infrastructure for consumption. The physical infrastructure goes to ports, not to shopping centres.”
Having analysed what it would take for China to replace the US as a consumer of goods, the IMF has concluded that China will not immediately replace the US. “The Chinese share of world imports is, like, five per cent, compared to 20 per cent for the US,” says the IMF’s Cardarelli.
“The goods the US consumes are different to those consumed by the Chinese. In the short term, any hope that China can replace the US is misplaced. There is still a long way to go.”
Although intra-regional trade has grown dramatically in the past decade, Cardarelli says: “It is all trade in intermediate products across Asia, but most of the products eventually end up being consumed in the developed economies, especially in the US.
“Once we net out the intermediate products from trade, and look at the value-added final products, the dependence of Asia on the US has actually increased over time.” Cardarelli refers to studies done in Hong Kong on China’s dependence on exports. In a paper published in March this year, the Hong Kong Monetary Authority said a 10 per cent drop in China’s exports is associated with a 2.5 per cent decline in China’s GDP growth – and that this figure is much higher than the estimated direct impact of exports on growth. (see page 36).
The crisis has shown that Asia is more
dependent on trade and capital markets in the
US and other developed economies than was
previously thought, say US observers.
Asia has rebounded faster and earlier than other regions because it fell more sharply than others when exports collapsed in a “sudden stop”. “We were not surprised that people were talking about a V-shaped recovery. When you fall at
double digit rates for
one or two quarters, which is unheard of, you are bound to have a V-shaped recovery,” says Cardarelli. There was trade paralysis in Asia in 2008 and early this year when, in a panic reaction to the economic crisis, global consumers stopped purchasing cars, electronics and other goods produced in Asia.
Although exports have recovered, they are still a long way from pre-crisis levels. “The question is what can be done to make up for reduced demand from the US and advanced economies. We believe the demand is not going to be there for quite a number of years,” says Cardarelli. “Our projections show that the US consumer is going to increase savings and try to restore damage to its balance sheet caused by this crisis, at least until 2014. That is, of course, a projection.”
Cardarelli says it is clear that Asia must ramp up domestic demand to pick
up the slack in US demand. “The crisis has hit the sectors in which Asia specialises – cars and highly-advanced manufactured products where demand is not expected to return in the foreseeable future,” he says.
And, according to Cardarelli, Asia’s investment has been linked to exports. He struggles to identify where domestic demand might come from within Asia. Even current consumption in Asia is linked, to a degree, to exports – because of jobs created by the export sector.
To be fair, most observers agree that China is changing. In response to the crisis, China has implemented a four-trillion-yuan stimulus package, and has put in place a wide range of measures to stimulate demand – including offering subsidies for rural people to buy whitegoods.
China is also starting to look at a pension system to provide a safety net, but much more has to be done in healthcare and education. Once these reforms are fully implemented, the Chinese populace may not feel the same pressing need to save.
Cardarelli sees this as “cyclical rebalancing”, and says the challenge for China is to make it permanent – that will require structural changes to China’s economy.
Economists say that, to encourage consumption, Chinese consumers must be able to access consumer credit. “It may sound ironic that we are telling Asia to move closer to the Anglo-Saxon financial system, which presumably has failed,” says Cardarelli. “But I don’t think that the system is essentially flawed – a good financial sector allows a lot of people to have access to credit."
He told ATI it is fundamentally a good thing for people to use wealth as collateral to access credit. This will reduce savings. One way you save is because you can’t borrow as easily.
But any change in Asia’s consumption pattern will have to be preceded by a change in mentality of its people.
“My grandmother lived to 97, and, as long as I knew her until the day she died, she maintained the Depression mentality. She saved everything,” says Clyde Prestowitz. “Asians, including Chinese people, have not been rich for very long. Even in Japan, which has been rich for 50 years, the Japanese are still not big consumers.
“There is some stimulus still in the pipeline that is going to flow to support the Chinese economy in the near term. About 50 per cent of the stimulus in 2009 was implemented during the first half of the year,” says Cardarelli. After that, we expect a gradual withdrawal of the stimulus, for sure.
“In the short term, there will be growth, because most Asian countries have only spent about 50 per cent of their stimulus programmes. But after that, the challenge for Asia and the global economy is for the regions to lift consumption. Until they do, global growth is going to be slower than it used to be, and the effect of this crisis is going to be more protracted than previous financial crises.” |
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