The economic downturn could be an opportunity for Asia's economies to come to the fore, if they can deal with its challenges
WE ARE living in what has been billed as Asia's century, the epoch when the emerging markets of China and India combine with the rising tigers of southeast Asia and the established but stagnant economic powerhouse of Japan to assert rightful global dominance, in a world where the axis has shifted to the east.
As the United States' leadership role in the financial markets takes a battering following the sub-prime lending fiasco and the collapse of the stock market, and Europe struggles to shore up the fall-out from its own misguided investments and poor oversight issues, everyone is watching Asia.
Is the global financial crisis the iceberg on which the emerging economies of Asia will founder, or will the global downturn prove the opportunity the big economies of Asia have been waiting for to add real political and economic muscle to their emerging market status?
The downturn has certainly affected Asian economies less than it has the West, but the extra attention on the region has also highlighted what a diverse bunch of economies are to be found in Asia, ranging from highly developed economies such as Japan, South Korea, Hong Kong and Singapore to the emerging economies of India, Indonesia and Malaysia.
And then, of course, there's China, unique in the world, let alone the region. The world wants this emerging monolith to play a role in sustaining global growth through domestic demand stimulus.
The West's, and indeed Ireland's, fascination with China is a long-term one. Lord George Macartney, an Antrim man educated at Trinity College in Dublin, led Britain's first trade mission to the court of Qianlong in China in 1793. While it was ultimately unsuccessful, and while Macartney's refusal to kowtow to the Emperor has gone into colonial legend, it did establish a precedent for future trade links.
Taoiseach Brian Cowen led Ireland's second biggest trade mission to China in October - the Ireland's biggest trade mission was also to China, in 2005. His presence at the head of the Enterprise Ireland delegation, despite political woes at home, was a recognition of China - and Asia's - growing importance.
During his visit, the Taoiseach addressed the seventh Asia-Europe Meeting (ASEM) at the Great Hall of the People in Tiananmen Square, a forum for 43 countries from Europe and ASIA.
European and Asian leaders were sharply critical of the US financial system and one of its main findings, without going into specifics, was a call for a new financial order. China said that it would actively participate in a November 15th summit that President George W Bush is convening to examine the global credit crunch.
Outside the Great Hall, on the streets of Beijing, there is little sign of any slowdown in effect, at least not yet. In Beijing, the process of getting back to normal after the Olympics means that it feels more like an upswing as the streets again fill with cars and the factories resume output following the enforced standstill for the Games. But the figures show that China is certainly feeling the pinch.
Annual gross domestic product growth slowed to 9 per cent in the third quarter from 10.1 per cent in the second, and the government has come out with a raft of monetary and fiscal measures in the past weeks to stimulate growth, including two cuts in interest rates and banks' required reserves.
While an upswing is expected in the second half, Chinese companies, long used to a positive outlook, are voicing fears of a sharper than expected slowdown as exporting firms close their gates. They speak of liquidity pressures and of falling demand for commodities such as coal and copper.
The slowing property market has seen renewed focus on government infrastructure plans. Many corporates are actually focused on the government for help.
To some extent, China is in a position where it can react to these challenges. The country has US dollar reserves worth €1.4 billion, which gives it a strong presence in the US debt market.
Premier Wen Jiabao is also making soothing noises. While weakening external demand was hurting the economy, he said his government was confident it could keep growth steady through appropriate policies such as developing the countryside.
There are many signs of flagging export growth in China, the world's factory. Hundreds of workers rallied at government buildings in the southern factory town of Dongguan in October to demand unpaid wages after a toymaker closed with the cost of 7,000 jobs. Rising raw material and labour costs and slowing US demand have been hard on the region where so many of the world's toys are made. According to the Xinhua news agency, 52.7 per cent of China's 3,631 companies making toys for export went out of business in the first seven months of the year.
Output has also been hit by China's stronger currency, which makes their products more expensive. Dongguan, adjacent to the boomtown of Shenzhen, has thrived on export-oriented manufacturing - half of all toys made in the province are made here. And yet there is no sense of gloom when you pass through the streets. Perhaps the depression is to come here, but it is certainly still a thriving centre of activity (see panel - page 39).
Australian mining giant Rio Tinto saw 18 per cent of its sales in China last year and the company's chief executive Tom Albanese said he expected the Chinese commodities boom to take a bit of a hit. "In the near term, the Chinese economy is pausing for breath. China is not completely insulated from an OECD recession and we will see an impact on Chinese exports," said Albanese. But the upturn is expected in 2009, next year, hardly a lengthy period in the doldrums.
It's also important to think about what exactly growth means in China. It is easy to think about China's export growth as being solely to the US and Europe, but there is a lot of trade between Asian countries, as well as growing trade with Africa, the Middle East and Latin America, which will help China weather the storm.
Central bank governor Zhou Xiaochuan has also been making soothing sounds, tempered with caution, saying the fundamentals of the Chinese economy remain sound and the country can cope with the challenges posed by the worsening global financial crisis. Despite the impact of the global financial crisis, Zhou said "we should recognise that the overall economic condition is good, our financial institutions are generally strong, with increased profit-making and risk-fending abilities, market liquidity on the whole is ample and our financial system is sound and safe."
Bankers and financial market players talk of "carnage" and "bedlam" as every day brings fresh horror on the markets. The stock market has performed some stomach-churning somersaults in recent weeks. The benchmark Hang Seng Index last Tuesday rebounded 14.35 per cent in one day, after its fifth worst ever single-day percentage loss of 12.7 per cent on the previous day.
At the same time, Hong Kong, like many southeast Asian economies, has already taken on board some unpalatable truths during the 1997-98 financial crisis and made some reforms which means the former Crown colony is reasonably well placed to survive the crisis.
Premier Wen Jiabao's comments that Beijing will provide any support that may be needed to help Hong Kong get through the economic downturn have been a comfort to investors and also supportive provided some comfort for investors.
Self-ruled Taiwan is encouraging closer economic ties with its rival in the civil war of 1949, under the leadership of President Ma Ying-jeou, who swept to power on a promise of encouraging closer ties across the Strait of Taiwan.
Hong Kong's regional rival for dominance in the financial services industry is Singapore. The global slowdown has had a particularly harsh impact on economies strongly dependent on external factors like Singapore, which became the first of the main developed Asian economies to enter recession in the third quarter.
Singapore is expected to grow by 3 per cent this year, but the city-state's central bank says it faces "further slippage" as the global slowdown threatens key areas of manufacturing, consumer spending and tourism.
"As the financial crisis evolves into a broader and more protracted contraction in economic activity worldwide, there will be significant knock-on effects for Singapore, given its heavy exposure to external demand," the Monetary Authority of Singapore said in a twice-yearly review. "The balance of risks facing the Singapore economy is currently tilted towards a further slippage in growth."
Given that financial institutions worldwide have reported more than €450 billion in losses and writedowns, Singapore is unlikely to escape the impact of the credit crunch, the authority said. Singapore's industrial output last quarter was the worst in almost seven years and electronics exports have dropped for 20 consecutive months.
Asia's fourth largest economy, South Korea, also relies strongly on exports, and growth hit a four-year low in the third quarter, bad news accompanied by a plummeting stock market. One of those exporters is Samsung Electronics, the world's largest memory-chip maker, which reporting a 44 per cent fall in third-quarter net profit and warned of tough times ahead.
However, the swift response by the government and financial authorities to introduce measures to stabilise the markets has been broadly welcomed, and both the credit agencies and the analysts do not believe South Korea is facing the extreme difficulties it experienced during the 1997-98 financial crisis.
The government has introduced a state guarantee of up to $100 billion on its banks' foreign debts, and also pumped $30 billion into local banks facing a shortage of the US currency, as well as a package to revive the building industry. However, political wrangling in the parliament makes it difficult for further stimulus packages to get through. President Lee Myung-bak's conservative government is under pressure for his perceived failure to deliver on the economic reform package that swept him to power, so the challenge in Seoul is as much political as it is economic.
In Kuala Lumpur the atmosphere in the business area around the giant Petronas Towers is muted as Malaysia wrestles with lower demand for key exports such as palm oil and crude oil, and finance minister Najib Razak said the government will cut its economic growth forecast of 5.4 per cent for 2009. Like other parts of the region, the stock market has plunged by 37 per cent this year and the government is trying to implement measures to prop up the markets.
According to the Malaysian Institute of Economic Research think tank, growth is expected to fall to 3.4 per cent next year, worsening if the US continues to decline.
Indonesia, the biggest economy in southeast Asia, has been particularly badly hit by the downturn. President Susilo Bambang Yudhoyono has announced measures to boost the rupiah, after the currency fell by nearly 30 per cent in the past four weeks. Stocks have fallen 59 per cent and are on track for their worst yearly performance ever, while government bonds are the worst performers in the region. Even here, however, there are glimmers of hope. The budget deficit is falling on lower oil prices and the government expects the economy to grow by between 5.5 and 6 per cent next year, and the government has introduced fiscal stimulus packages for businesses such as tax cuts.
Leadership in resolving the crisis is unlikely to come from India, where the latest indicators show that the economy may expand 7.7 per cent in the year ending March 31, lower than the 7.9 per cent forecast in June.
One question many analysts are asking is where is Japan in all of this. Japan suffers from many of the same ills that blight the US and European economies - ageing population, stagnant demand, low growth and a financial system in need of reform (see page 40).
For some major international companies there is little option but to pursue the market in Asia, because of stagnation or saturation in their traditional markets in the West. Carl Leaver, head of international strategy at Marks & Spencer, said during the opening of mainland China's first shop, that China offered a major opportunity for expansion.
The group has 300 stores in nearly 40 countries, and has been in Hong Kong for 10 years. The company hopes to open up to 50 stores in the country, part of its plan to become more international.
"There are 1.3 billion people here, one billion in India. These are two markets we're in. If one in eight of the Chinese population ends up wearing Marks & Spencers' knickers, then we'll be happy," said Leaver.
This echoes the hopes of the Lancashire linen manufacturers of the 19th century who dreamed of selling shirts to the Chinese. With globalisation considerably more advanced these days, it's a more realistic prospect that we will see Chinese in Marks & Spencers undergarments.
Asia's ability to stand on its own two feet better than in the late 1990s is one reason for optimism, and the healthy savings habits of many Asian countries are another. Even if the slowdown hits hard, the region's economic resilience means that this could still well be the Asian Century.
Asian AmbitionsChina Can Ride Out Economic Situation
RECORD FALLS in Asian stock markets show that lack of confidence knows no borders.
The start of last week saw Asian markets fall dramatically, while Hong Kong and Tokyo saw record lows, on the back of a few pieces of bad news. Japan announced a substantial increase in the recapitalisation funds to help its banks; the largest of China's state-owned commercial banks, ICBC, reported lower than expected profits and further afield; IMF bail-outs of Iceland and Ukraine underscored the fragility of economies to balance of payments crises.
The dramatic falls in Asia underline doubts over the exposure of Asian banks and financial institutions to a crisis that began in the US. For much of developing Asia, the US remains the main export market - leaving those economies susceptible to the vicissitudes of US markets.
However, Asia does have independent engines of growth. For example, India's own consumers provide much of its growth, while the IMF estimates China overtook the US as the largest engine of growth in 2007 and contributed about a third of global economic growth in the first half of 2008.
Recent years have seen a growing emphasis on Chinese trade surplus. Despite official estimates recording a halving of exports in the third quarter, however, real economic growth was recorded at 9 per cent per annum - that is, the halving of exports cut the growth rate by 1.2 per cent.
It follows, therefore, that were Chinese exports to fall to zero, China would still grow at 7.8 per cent. Such a figure is inevitably imprecise, but it squares with China's impressive growth rate before the big economic opening-up of the 1990s.
Consumption in China accounts for half of GDP, which has room to increase, particularly if the government provides better social welfare, which would reduce the motive for precautionary saving.
Saving is likely to remain high in China, but a modest reduction will help to decrease the investment rate, which is fuelling asset bubbles in the country.
The state ownership of China's banks means recapitalisation can be rapid. Indeed, nearly all of the large banks have received sizeable injections in the past.
Although the crisis will cause concern in China, its government also has the funds to support its economy after several years of impressive growth. China may well emerge with a strong set of domestic growth drivers as a result.
- Linda Yueh, The Guardian
