BANGKOK - If China slips,
how far will Southeast Asia fall? With the United States and Europe facing
prolonged and potentially worsening economic downturns, concerns are rising
that China's earlier resilience to global economic turmoil is starting to fade,
darkening the outlook for the rest of emerging Asia.
China's resilient growth helped
Southeast Asia bounce back briskly from the 2008-9 global financial crisis,
providing an alternative and fast growing source of demand for the region's
many export-geared economies. The recent rise of that intra-regional trade has
been interpreted by some analysts as a sign that Southeast Asia has
''decoupled'' from its past heavy reliance on Western export markets through
greater integration with China.
Hard and soft commodities now
account for 44% of Southeast Asia's total exports, a percentage that has risen
this year while the region's manufacturing shipments to the US and Europe have
faltered. China's emergence as a source of final demand for food, fuels and
basic manufactured goods has contributed to the shift, a trade trend that has
buoyed commodity exporters in Indonesia (coal, natural gas), Malaysia (palm and
crude oil) and Thailand (foods).
At the same time, a much larger
percentage of the region's China-bound exports are processed in Chinese
factories into products that are ultimately re-exported to the wider world.
While China's share of global imports has nearly doubled since 2003, rising
from around 5% to 9%, its global share of domestic consumption is still small
compared to the West. Consumption is a mere 35% of gross domestic product (GDP)
in China, around half the amount in the US.
For Southeast Asia, China still
serves more prominently as a regional assembly plant for re-export than as a
final consumer of its commodities and products. Credit Suisse, an investment
bank, shows in recent research that while official trade figures in Indonesia,
Malaysia, Singapore and Thailand indicate that less than 30% of each countries'
total exports are sent directly to the West, the actual diversification is
misleading when the final destination of the products is traced.
While less than 20% of
Singapore's exports are sent directly to the US and Europe, correlation
statistics show that nearly 90% ultimately end up in either market. Only 20% of
Indonesia's shipments are sent directly to the West but 85% eventuate in the US
and Europe after being re-exported from second countries, mainly China. In
Thailand, where exports account for over 70% of GDP, the breakdown is 25% and
85% respectively. (Although less export-oriented, the Philippines has the most
genuinely diversified trade in the region.)
Statistical haze
China's dominant role in
processing and re-exporting Southeast Asia's commodity exports make the region
especially vulnerable to a potential Chinese downturn. A residential property
bubble, the impact of rising wages on global competitiveness and signs of
weakening exports all threaten to undermine China's 2012 growth prospects. The
question to many analysts is whether China's economy will merely slow or
totally collapse.
Amid those signs of trouble,
Chinese authorities are apparently doctoring official statistics more than
normal to maintain confidence in the broad economy's direction. Investment bank
analysts note that robust export growth figures for November reported by
China's General Administration of Customs are at clear odds with more downcast
container throughput statistics released by different Chinese ports.
The upbeat export growth
statistics are also at seeming odds with the growing number of reported factory
closures in the country's southern export belt, which in recent months has been
buffeted by rising worker unrest. Doubts have also been cast on last month's
official 16.9% jump in retail sales, which was out of step with a coincident
month-on-month fall in inflation. China's residential property problem,
meanwhile, is the country's largest statistical black hole.
With those contradictory
indicators, economic analysts are now weighing hard and soft landing scenarios.
The soft landing view foresees Chinese central technocrats responding timely
with well-calibrated fiscal and monetary policies that maintain GDP growth of
around 8%, the annual rate Beijing must achieve to absorb new graduates into
the work force and keep unemployment manageable.
The hard landing scenario
predicts that an uncontrolled implosion of the property market will unleash
waves of wealth destruction, a credit crunch and consumption collapse that no
amount of government intervention will be able to meaningfully forestall. That
view sees worrying similarities, including a property bubble, questionably
lending practices and deterioration in the current account, to the signs seen
before Southeast Asia's spectacular 1997-8 financial and economic collapse.
Blind consensus
Despite those signs of
weakness, the consensus view among international investment banks, multilateral
lenders and sovereign rating agencies is for a soft rather than hard landing.
The World Bank's 2012 economic growth forecasts for Southeast Asian countries
are predicated on economic growth of around 8% in China. Investment banks CLSA,
JP Morgan and UBS have all forecast in recent research notes a moderate rather
than severe slowdown in China next year.
Kim Eng Tan, a director of
sovereign and international public finance ratings at Standard & Poor's,
plays down the potential for a near-term hard landing, in part because the
government will prioritize and has the policy tools at its disposal to maintain
strong economic growth during the leadership transition from President Hu
Jintao to Xi Jinping scheduled for the autumn of next year. He argues that
China's property bubble is less risky than the ones that have popped in the US
and Europe because China's banks have lent mainly to the rich and powerful
rather than subprime borrowers who have defaulted en masse on their housing
loans in the West.
Sriyan Pietersz, JP Morgan's
Bangkok-based head of research, believes there is room for China's central
technocrats to take a policy ''middle path'', one that maintains steady fast
economic growth and continues to buoy Southeast Asia. He believes economic
managers will respond in ''two step'' fashion, with new stimulus measures
targeting the productive side of the economy while other policy measures
address problems in the non-productive sector, ie the property market.
Such a policy balance, Pietersz
argues, would maintain strong Chinese demand for Southeast Asian commodities,
an asset class he views as a ''safe haven'' from global market volatility
because most - including liquefied natural gas, coal and rice - are not traded
on formal financial markets and thus are priced more by underlying demand than
market-driven speculation.
Unlike the 2008-9 global
financial crisis, when a crash in global manufacturing drove a collapse in
global commodity prices, the two are moving in divergent directions
(manufacturing down, commodities up) under current market pressures. Pietersz
argues that's because Chinese authorities are reacting more quickly to the
threat of global weakening than they did in 2008, including a recent easing in
reserve requirements for lenders and ramped up central government fiscal
spending on infrastructure.
Tide of history
While China is reacting, other
analysts have already raised doubts about the quality of the response and
authorities' ability to quarantine the economic good from the bad. A similar
state-led push in 2008-9 bankrupted many provincial governments who were given
a carte blanche to spend to maintain fast national growth. The head of research
at an international investment bank, who requested anonymity because his
personal views are at odds with his institution's soft landing forecast,
questions the economic wisdom of current fiscal plans to build as many as eight
million new public housing units and thus boosting supply at a time the private
residential market faces a price bubble.
He argues that no country in
economic history has ever invested over 40% of GDP for five consecutive years -
real-estate investments account for nearly half of the recent overall rise in
total investment - and not eventually suffered a financial crisis. One of his
top institutional investor clients is now short-selling consumption-related
stocks worldwide in anticipation of an eventual Chinese, and by association,
commodity price collapse.
Should that bearish view gain
greater market currency, commodity prices would likely be among the first
China-related asset classes to tumble. There were indications markets were
moving in the direction in September when many Southeast Asian stock markets weakened,
apparently amid concerns about the durability of China's future growth. While
Southeast Asia has benefited by piggybacking on China's until now strong growth
and demand for commodities, the region will inevitably be among the worst hit
by a soft or hard landing in China.
Shawn W Crispin is Asia Times
Online's Southeast Asia Editor.
Business & Investment Opportunities
YourVietnamExpert is a division of Saigon Business Corporation Pte Ltd, Incorporated in Singapore since 1994. As Your Business Companion, we propose a range of services in Consulting, Investment and Management, focusing three main economic sectors: International PR; Healthcare & Wellness;and Tourism & Hospitality. We also propose Higher Education, as a bridge between educational structures and industries, by supporting international programs. Sign up with twitter to get news updates with @SaigonBusinessC. Thanks.
No comments:
Post a Comment