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As 2011 draws to a close, there are growing signs
that Asia is getting caught up in the global
slowdown, dashing hopes that the region’s economies
would decouple from the prolonged recession in the
global lacklustre 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 45pc of pan-Asian gross domestic
product (GDP) 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 half of
these exports are still headed to developed
countries.
So the idea of decoupling appears to be a chimera.
Even if the crisis is resolved, austerity in Europe,
along with anaemic 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 60pc in the early 1980’s to less
than 50pc today. In China, it is less than 40pc, far
below the norm for the world’s major economies and
for other Asian economies at a comparable stage of
development, despite nearly seven per cent 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 20pc of the
world’s population, nearly 11pc of global GDP, but
only three per cent 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
28pc increase in revenues over the last year and has
more than three trillion dollars 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. Intraregional 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, intraregional 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 fuelled
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 45pc
of GDP, and, consistent with China’s long-run
urbanisation 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, 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. It
needs to do so in ways that do not rely on excessive
credit expansion.
The recent five-year plan of China, which will take
effect in 2012, recognises these policy imperatives
and calls for several measures to fulfil them,
including wage increases for urban workers; income
support for rural households; enhanced access to
capital for small businesses, especially in the
under-built service sector; and more generous social
welfare programmes, which will 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. |
