ASIA HAND Southeast Asia-China rise, fall together
By Shawn W Crispin
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.
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