Asia is de-coupling
A post from Reuters in overnight trading in Asia caught my eye. It proclaimed “Asia faces up to challenges of global crisis." What I found particularly interesting about the post was the fact that the Asians had set up a $120 billion fund through the Asian Development Bank which excluded the International Monetary Fund (IMF) as the go-to organization in a crisis. Reuters says the following:
Asia has been hard hit by the collapse in global demand largely because of the region’s heavy reliance on exports. Singapore, Hong Kong, Taiwan and Japan are in recession and growth elsewhere is the weakest in years.
"Poverty is worsening in many countries. Businesses are struggling. The extremely urgent climate change agenda could be affected," Indonesian President Susilo Bambang Yudhoyono said at the annual meeting of the Asian Development Bank.
"If all this goes unchecked, down the road we could see social and political unrest in many countries," he told representatives of the ADB’s 67-member countries, including finance ministers and central bank governors.
To counter the downturn, the ADB said it will raise lending by half and Asian governments agreed at the weekend to launch a $120 billion fund countries can tap to avert a balance of payments crisis.
You will recall that the Asians were forced to go cap in hand to the IMF for bailout funds after the Asian Crisis in the late 1990s. This experience was very humiliating for some and caused extreme hardship as the IMF programs were rather severe and deflationary. Resentment toward the IMF remains as a result. I see this development as an explicit measure to exclude the IMF in Asia. I am not the only one who noticed this. Marc Chandler the Chief Global Currency Strategist at Brown Brothers Harriman sent out a missive today titled "The Beginnings of an Asian IMF?" saying:
Back in the 1997-1998 Japan proposed an Asian-based IMF, the US objected and the issue seemed to be closed. However, during this crisis, a modified version appears to be in the works and without the international objections.
ASEAN+3 (Japan, China and South Korea) confirmed over the weekend that a $120 bln fx reserve pool will be established by year-end as the Chiang Mai Initiative is expanded. Participating countries can borrow up to 20% of their quote (agreed upon swap ). The other 80% can be accessed only after an IMF-like agreement. At first multilateral agencies, like the IMF and ADB, will be tapped for their expertise, but the intent to be independent is clear. Over time, their own surveillance unit will identify risks and provide oversight.
Separately, Japan offered a $60 yen-swap facility and to guarantee yen-denominated bonds (samurai) issued by developing countries. This is in addition to contributing $38.4 bln to the reserve pool (the same as China–including HK). South Korea will provide $19.2 bln. The four largest economies in ASEAN–Thailand, Indonesia, Malaysia, and Singapore–will each contribute $4.77 bln each, and the Philippines will pony up $3.68 bln.
Now, you should note that the CLSA China Manufacturing Index for April also came out overnight (see Econompic Data’s charts), with the index registering expansion in China for the first time in nine months. The reading was 50.1 in April versus 44.8 March. This indicates that the stimulus efforts of the Chinese government are indeed having the wanted effect on demand as I suggested last week. Therefore, I am officially abandoning my downbeat forecast for Chinese growth (see my predictions for 2009).
Asia looks poised to break away from the West, dare I say de-couple. I am loathe to use that word because the inter-connectedness of the global economy has meant that negative demand-side shocks in the West will be felt in Asia as well. Nevertheless, Asia looks to be developing an Asia-only dynamic and re-focusing on internal trade and politics. This is good for Asia, but, for the West, not so much.
Asia faces up to challenges of global crisis – Reuters.
Your RSS feed was acting up a week ago. Now to my dismay, it’s completely broken — both the feeds.creditwritedowns,com and the creditwritedowns.com/feed. Thought you’d like to know.
1. The saving rate in China is very high about 50%, (S. Korea ~20%). If Chinese start to spend like the U.S., there will be a real de-coupling.
2. China has started to reform their medical system. Poor in medical safety net makes people hesitate to spend. In 2001, Thailand had a similar medical reform which led to Thai people changing their spending habits. In 2002 & 2003, the Thai stock market were hence up 143%.
3. The unemployment rate in China is fishy. The last figure they released was the employment rate and salary were up little and has created about 200k new position in the last quarter. However, given that each year china normally creates about nine million job positions. (or at least 2million job position per quarter) The last quarter created 200k job is far from enough to absorb the labour from the rural area and fresh graduates. If there are so many people are being jobless, how can the salary raised as reported?
I have asked people from the internet, their answers are very interesting too.
a. The employment rate only counts for those have an “account” in city. Those who come from rural area even though are not working, will not be counted.
b. If you work as a causal insurance or Amway agent, even if you only get paid every few months, you are not counted as unemployed.
c. A lot of companies pay their employees for peanut as the basic salary like hundred yuan per month (this amount of money is not enough to maintain the basic expenses these days). These employees stay at home but no need to work, are not counted as unemployed.
d. A message from a Shanghaiese, he said if you are unemployed, you need to report to the government that you are unemployed. If you do not report to the government for three months, you are not unemployed. However, even if you report to the government, the government won’t hand out any money or help to you. So why be bothered to report?
Moreover, think about it, if there is not really a big threat to the economic downturn in China, why the chinese government let their banks to relentlessly lent money out in the last few months?
Started from last week, a lot of web blogs in china are seriously screened. Much much much heavy handed than usual.
Shades of Peter Drucker here. I remember back in the 1980’s he wrote a piece for The Economist about how financial markets in the US were decoupling from the real economy. In retrospect the fallacy of the argument seems patently obvious but at the time Drucker had been right enough times to lend a lot of weight to even specious claims like this one.
The idea that China, or any Asian economy, can decouple is similar to Drucker’s old view of a decoupled financial and real economy in the US. When one views China’s economic structure – i.e. a near absence of an internal consumer economy and huge dependence on exports – any decoupling must be temporary at best.
Neither China nor Japan, the world’s number 4 and 2 largest economies, has any appreciable internal consumer economy in relation to its exports. With world trade stagnating just how long can these two “decouple”? Stimulus will go only so far. If Europe and North America do not start buying the “decoupling” will soon become an intense “coupling” and shared economic pain.
China and Japan must be crossing their fingers and hoping for a rapid recovery in their trading partners before this “decoupling” becomes what it really is: a short term stimulus bump before a looming contraction due to an export crash.
Pumping RMB 5 trillion in the Chinese economy in one quarter, something will move. Is this sustainable?
Steven, that is the right analysis and the right question. As I have been saying for a few months regarding the U.S. and the present upturn of fortunes, “Don’t underestimate the power of printing money.” The same can be said in China: if the government spends massive amounts of money, things will go up, no doubt. The question is whether it is sustainable.
I saw Pettis’ piece and I thought it was very much to the point (although you should be aware of his bias). If the money is spent and wasted, then it is not sustainable. Pettis suggests this is what is happening. Quite frankly, it is too early to call.
I would say, however, that Asia looks to be circling the wagons in a way that could portend an incipient internal demand dynamic. This pattern will take years to develop, so it is probably unlikely that Asia-internal demand can replace demand from the West, but if Asia spends enough now and waits for the West to pick up the slack down the line, they can make the bridge to an internal demand model.
Stimulus is not the same as a structural change in the economy. China’s stimulus provides no permanent boost to its domestic demand, for a population that has a per person GPD about the same as Angola. The lack of structural change should become evident once this wave of stimulus is over.
This counter-IMF shouldn’t bother Washington one bit. Japan is a long-time ally, as is South Korea. And the IMF is too Euro-centered for the US’s taste. If it puts a check on that, as a balance, it’s not something the US would consider bad.
“which excluded the International Monetary Fund (IMF) as the go-to organization in a crisis”
I wondered whether any country would realize what bunch of incompetent idiots IMF really is. And here it comes at last!
Yes, an Asian IMF will take a long time:
China asked for a postponement of an ADB board meeting on March 26-27, which was set to discuss the 2009-12 strategy for India. On the table was an Indian request for a US$2.9 billion loan approval. What appears to have got China’s goat was the inclusion of a $60 million flood management, water supply and sanitation project in Arunachal Pradesh.
I don’t know much whether India flood project will stop the ADB swap facility, I very much doubt India has much say in ADB affairs. If you have been living in Asia for the last 30 years, you will know that Japan and recently China runs the ADB. Japan and China are unwilling bedfellows politically, but clearly on the same page economically, as is much of east and southeast Asia.
Sometimes its hard for westerners to understand why things happen in Asia through their tinted glasses, and when they observe a data point, immediately draw the conclusion familiar to them in western economies. Asia is obviously command economies. Governments control a large part of the economy outside of exports, and even for exports, tariffs often distort the true economic picture. Real estate, stock markets (this one is common with the US which has a largely manipulated stock market), salaries, infrastructural development and social benefits (where they exist) are hugely government directed and accounted for in the GDP using more datapoints provided by governments. The Chinese government PMI often offers contradictory numbers to private numbers, and even then, all the government needs to do is make a discrete enquiry and the private PMI numbers fall in line the next time to correlate nicely with official figures. Chinese banks lent much in 1Q 2009, much of it to companies who then use it to speculate in stocks or pay off long-term creditors to keep suppliers alive, and of course state-owned companies like AVIC who were “asked” to take the loans first then decide what to do with the billionsfrom banks. Small companies are closing by the droves but they are not included in state statistics, China is like Indonesia, the “gre” economy which em[ployes millins or rural workers are unaccounted for and have no access to credit. SOme bigger companies obtained loans recently and made good business on-lending them at higher interest rates to the grey market. Some western analsysts say the surge in loans is pent-up demand after the tightening in 2008, actually it is just propping up zombie companies who are still standing. The only similarity between east and the west is the impact of rising stock market and real estate prices on the pyschology of the consumers. If you understand the role of real estate and stock market and understand the role of governments, then it is not difficult to see that command economies can “engineer” quick turn around. And mind you, unlike Japan, the Chinese government has the resources to engineer this upturn for at least another 5 years. So no one is holding their breathe here waiting for US and urope to tunr. While exports were thriving, there is little need to engineer any extra growth, but when it rains, countries like Korea, Singapore, Taiwan and China all have the resources to pump their economies for many years.
On the occasion, a reminder:
“Tim Geithner was the Treasury line officer who wrote the IMF program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis [..] It takes a gigantic fool to mess that up. But the IMF messed it up.”
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