Search Thursday May 6, 2004

False Alarms: Asia will survive Beijing's belt-tightening
By Philip Bowring (IHT)
Friday, May 7, 2004

HONG KONG: China has always been a great generator of myths - and destroyer of foreign perspectives. The latest myth: When China sneezes, Asia catches pneumonia.

Beijing's belated economic belt-tightening, some high profile economists proclaim, threatens economies throughout Asia, perhaps even sowing the seeds of another Asian crisis. Export growth, especially of commodities, will implode, they say, causing rising unemployment and even balance of payments crises. Political pundits who would never dare venture an opinion on the U.S. banking system warn of the global threat posed by China's banks.

It would pay to remember, however, that some of the same pontificators could be heard not long ago expounding on the threat to the rest of Asia of China's advances.

For sure, over the past year exports to China, rising 35 percent for countries like South Korea, have been the biggest single factor in export growth and, in some cases, of overall growth in gross domestic product. That is obviously not going to continue. Commodity prices are off the boil and the reining in of China's investment excesses will eventually put a lid on purchases of capital equipment.

But so what? The rise of Chinese demand has simply diversified the markets of its Asian neighbors, who were once overly dependent on the United States and Japan. Here are a few relevant facts:

China's growth may well slow from around 9 percent to 6 percent or less. But that is still healthy enough for most of its trading partners. China's problem is excess investment - now 40 percent of GDP - rather than aggregate demand. Investment cutbacks will hurt some industries, but there is plenty of scope for consumption to grow faster. The authorities' problem is how to bolster consumption while dampening investment. Consumption will drive imports even as capital goods purchases ease off.

Japan and the European Union remain bigger influences on the global and regional economy than China. The rest of Asia emerged from its crisis with scant help from Japan, which was then in the doldrums. The chances are good that the Japanese economy now has some self-sustaining momentum and that domestic demand recovery will survive a slower China.

Asian countries, as well as China, have been continuing to gain global market share, especially in fast-growing information technology and communications industries. This trend seems likely to continue as the region advances in technology and productivity. Global demand, rather than China-specific demand, is the key factor.

Huge trade surpluses and excessive levels of foreign exchange reserves will enable Asian countries to keep interest rates low as those elsewhere rise. Asia, unlike the United States and Britain, has real savings, not the faux-savings generated by house price increases spurred by cheap money.

Asset price reflation in Asia has been taking place under the stimulus of easy global money conditions. But it is mild compared with the West's. With a few Japanese and Chinese exceptions, Asian assets remain cheap by U.S. and EU standards despite superior economic growth and demographic credentials.

Currency appreciation could also offset the return of inflation caused by commodity price increases. With large savings excesses, most of Asia can afford to stimulate consumption if investment, other than in China, fails to rise.

Despite the SARS and security scares last year, tourism is booming throughout Asia and will be sustained by more liberal Chinese exit policies and the arrival of low-cost airlines.

High prices for oil, palm oil, rubber and copper are helping Southeast Asian economies - Indonesia, Malaysia, Thailand - more than they are hurting commodity importers like South Korea, Taiwan and Japan.

China's demand has been a major factor in the surge in commodity prices. There may have been some stockpiling and speculation as a result. But China's overall commodity demand will continue to grow. Meanwhile it will take years, not months, to make up for a decade of underinvestment in mines, oil wells and forests.

China's banking system is to blame for vast misallocation of resources. But state-owned banks do not go bust, however bad their management. The negative effects will be long-term lower growth, higher state debts and increased income imbalances. But the major banks will not be put at risk as a result of premature privatization in the foreseeable future.

For sure, times are going to get tougher everywhere as the U.S.-led global money printing rampage winds down, but China's Asian neighbors will be the least of the world's problems.