Sunday, October 26, 2014
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Asia Enters the Storm

BERKELEY – As 2011 draws to a close, there are growing signs that Asia is becoming caught up in the global slowdown, dashing hopes that the region’s economies would “decouple” from the prolonged recession in Europe and America’s lackluster recovery. China’s export growth is slipping, owing to faltering demand in Europe, which has surpassed the United States as China’s largest foreign market. Indeed, China’s manufacturing activity is contracting for the first time in almost three years. Reverberations are already evident in other emerging Asian economies that depend on exports both to China-based manufacturers and to the US and Europe.

Decoupling did not occur in 2008, when exports accounted for about 45% of pan-Asian GDP (excluding Japan) and every emerging country in the region experienced a sharp contraction in growth as world trade plummeted. Nor is decoupling likely today, because exports still account for about the same share of the region’s GDP, and about 50% of these exports are still headed to developed countries.

So the idea of decoupling appears to be a chimera. Even if the euro crisis is resolved, austerity in Europe, along with anemic growth or worse in the US, will mean a slowdown in export-dependent Asia. But Asia’s economies can still grow much faster than the developed West if they respond to prolonged stagnation by rebalancing their growth toward internal demand, especially household consumption. The good news is that these economies have substantial room for such rebalancing, as well as the policy flexibility to accomplish it.

The share of consumption in GDP in these economies fell from more than 60% in the early 1980’s to less than 50% today. In China, it is less than 40% – far below the norm for the world’s major economies and for other Asian economies at a comparable stage of development – despite nearly 7% annual average growth in China’s per capita consumption in recent years.

The Asian economies are home to 3.5 billion consumers, but their share in global consumption remains small – much smaller than their share in global GDP. China alone accounts for 20% of the world’s population, nearly 11% of global GDP, but only 3% of global consumption.

China and most of the other emerging Asian economies have strong government balance sheets – the GDP shares of their budget deficits and public debt are relatively small. As a result, they have the fiscal firepower to boost consumption in order to mitigate the effects of declining exports.

True, many local governments in China are saddled with debt, some of which may need to be restructured. But the central government enjoyed a 28% increase in revenues over the last year, and has more than $3 trillion in foreign-exchange reserves. In addition, the moderation of inflationary pressure as a result of slower growth and cooling global commodity markets will allow Chinese and other Asian policymakers to shift their focus from containing economic overheating to rebalancing growth. In China, where inflation is falling sharply, monetary policy has already begun to ease.

Even with significant policy support, however, most of the smaller Asian economies – Taiwan, Thailand, Singapore, and even South Korea – will not be able to replace external demand with internal demand to the same extent that China can. So, even with rebalancing, exports will remain a significant determinant of their growth, and China is already their major export market.

That is why China’s rebalancing is so important not only for its own economy, but for all of China-centric Asia. Intra-regional trade flows have surged during the last decade, but they have been concentrated in parts and components that go into finished products assembled in China for export to developed countries. With depressed markets in the developed world, intra-regional trade in the future will depend more on exports to satisfy Chinese domestic demand. Again, there is cause for optimism: China’s imports from Asia have been growing faster than China’s exports to the US for the last several years.

China responded to the 2009 global slowdown with dramatic fiscal and monetary stimulus, which fueled a rapid investment-led recovery at home and throughout Asia. Investment, mainly by local governments and state-owned companies with easy access to bank financing, soared to more than 45% of GDP, and, consistent with China’s long-run urbanization strategy, was concentrated in infrastructure and property-development projects.

Over time, much of the expansion in capacity will be absorbed, as an estimated 15 million people move from rural to urban areas each year over the next decade. But, for now, many investment projects are not yet generating enough income to service their debts (some of them never will), and there is significant spare capacity.

Confronted with another global slowdown that could depress its export markets for years, China needs to boost consumption even as it cools investment. And it needs to so in ways that do not rely on excessive credit expansion.

China’s 12th Five-Year Plan, which will take effect in 2012, recognizes these policy imperatives and calls for several measures to fulfill them, including wage increases for urban workers; income support for rural households; enhanced access to capital for small businesses, especially in the underbuilt services sector; and more generous social-welfare programs, which would reduce Chinese households’ high levels of precautionary saving. All of these measures are already underway, and Chinese leaders appear committed to embracing a new growth strategy that will benefit both China’s population and Asia as a whole.

The Asian economies should not count on being able to decouple from the economic woes of Europe and the US in the short run. But there are promising signs that, over time, the advanced countries’ difficulties will trigger a healthy, if belated, shift in Asia’s development strategy, with China leading the way.

Read more from our "Asia's Tipping Point" Focal Point.

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