Ten years after the Asian crisis, the region is revelling in strong growth and booming markets. The exuberance was palpable over the weekend in Kyoto, Japan, where the Asian Development Bank (ADB) held its annual meeting. Politicians, bankers and economists from every financial centre chewed over the vast opportunities in a region many fled a decade ago and, until recently, pointedly avoided.
The spotlight on Asia’s growth rates is also spawning hubris about how far the region has come since 1997. Perhaps the best example is the argument that China and India are doing so well that Asia no longer needs the US economy.
“This idea of Asia decoupling is a complete myth,” Ifzal Ali, chief economist at the Manila-based ADB, said in an interview in Kyoto. “It’s simply not supported by the facts.”
Other economists, including those at Merrill Lynch & Co., have a very different view.
“We’re increasingly confident that Asia can withstand a US slowdown,” Merrill’s Asia-based economists argued in an April report. “New export markets (Japan, Europe, and the developing world), new export products (services and labour), domestic demand (especially investment) and supportive macro policies all should help cushion regional growth as the US slows.”
To economists such as Ali, the emphasis should be on the word “cushion.”
Asia is booming and has more growth locomotives than it did a decade ago. Japan, which was sliding into deflation in 1997, is growing again. And as Merrill Lynch points out, China and India combined now account for more than 20% of global gross domestic product in terms of purchasing-power parity, greater than the US economy’s 19.7% share.
Looked at that way, Asia would appear to be immune from a US slowdown. Yet in a new report, Ali says the forces of globalization and changes in the nature of trade are merely masking Asia’s vulnerability to the US.
Take China, the largest driver of regional exports in Asia. For all the excitement about China’s 11% growth and 1.3 billion-person market, its final demand—essentially, goods purchased in China—accounts for only 6.4% of total Asian trade. That’s only half the contribution of Japan.
When you dissect Asia’s trade data, more than 70% of the trade within the region consists of the so-called intermediate goods that are used in production, according to Ali. Of this, half is created by demand outside Asia. And roughly 61.3% of total Asian exports are eventually consumed in the US, Europe and Japan.
“It’s still the case that if G-3 economies, particularly the US, sneeze, Asia catches a cold, too,” Ali says. “Weak demand in the US will hit the current drivers of Asian growth, which then will hurt the rest of Asia.”
None of this is to downplay the important changes that swept Asia after the 1997 crisis. Financial systems are healthier, living standards are generally higher and enough currency reserves have been amassed to shield economies from volatility in markets.
“But investors shouldn’t get ahead of themselves in thinking that what happens in the US doesn’t matter in Asia,” Caio Koch-Weser, vice-chairman at Frankfurt-based Deutsche Bank AG, told me in Kyoto.
Peter Fisher, head of Asian operations for New York-based investment firm BlackRock Inc., said “Asia hasn’t decoupled from the US as much as it’s synchronizing” with trends in the biggest economies. What’s more, Fisher warned that investors—in Asia and elsewhere—may be misreading the nature of risks emanating from economic balances around the globe.
“It always worries me when we all agree on something,” Fisher said of the commonly held view that imbalances such as US budget and trade deficits, an undervalued Chinese currency and ultra-low Japanese interest rates are unsustainable. Yet they have gone on for so long without a crisis or official measures to fix them. “That says to me that we don’t understand them yet,” Fisher said.
Another reason Asia isn’t as independent from the US as believed, is the action taken in Beijing and New Delhi to cool growth. A key presumption of the Asia-decoupling argument, after all, is for China and India to keep zooming along. Japan’s economy, meanwhile, remains an export-driven one. Robust domestic demand in Asia’s biggest economy remains elusive.
Driving the Asia-can-stand-alone theory is the region’s success in withstanding slower US growth in 2006, a period characterized by a plunging housing market. Yet, the housing bust didn’t send the US into recession, as many predicted, said Abby Joseph Cohen, New York-based chief US investment strategist at Goldman Sachs Group Inc.
In other words, the Asia-decoupling view has yet to be tested. If it were, more than a few investors betting on strong Asian growth in the years ahead might be sorely disappointed. “Asia has come a long, long way since the crisis,” Ali said.“But let’s not exaggerate how much it’s ready to stand on its own. This region will get there—it’s hardly there yet.”