Emerging Asian Economic Growth and CDS Levels

by: Jim Delaney

A group of Asian nations gathered for a summit in Cha-am, Thailand this past weekend to discuss forming a bloc similar to the EU. To the extent that necessity is the mother of invention, a statement by Thai Prime Minister Abhist might best sum up the ethos behind the gathering.

“The old growth model, where, simply put, we have to rely on consumption in the West for goods and services produced here, we feel will no longer serve us as we move to the future.”

They say you should be careful what you wish for and that could prove correct once again as the IMF included efforts by Asian nations towards increased domestic consumption, not to mention the West getting its fiscal house in order, in its recent wish list.

The meeting must have had a fairly ebullient ambience as China reported last week that GDP rose 8.9% YoY in 3Q09 after a 7.9% rise in 2Q09 with industrial output moving into the teens (13.9%) in September after a 12.3% rise in August. “Orders are piling up on our end. Now my headache is how to get our production to catch up,” Su Qisen, VP of a luggage manufacturer said recently. SQ plans on hiring up to 5,000 more employees, adding to the 10,000 already on the payroll and given the competition for labor says he will probably have to “raise wages 10% to 15%.” It would appear that fears from a few months ago that the Chinese economy would sink as stimulus wore off might have been slightly overdone.

As “domestic demand” goes it seems China has things well in hand as a recent article in the “Straits Times” newspaper contained a story about “a young Chinese woman who dispatched 30 Mercedes Benzes to pick up her $580,000 Tibetan mastiff from the airport.” It looks like JZ is going to have to step up the “bling thang” if he’s going to keep up with that Chinese woman.

Just yesterday South Korea joined the growth party posting a 2.9% rise in 3Q09 GDP - the fastest quarterly pace in seven years in Asia’s fourth-largest economy. Oh Suktae, an economist with Standard Chartered was a bit cautionary after the economic release saying: “Continued strength in exports will be the main driver for economic growth.” While not as economically independent as they would like when your GDP is busting 7 year records it gives you a little room to maneuver.

The growth in Asia is such that central bankers in the region are now having to contend with the onset of inflation. Recent CPI numbers were 2.2% YoY for Korea; 2.83%YoY for Indonesia and wholesale prices in India are up 0.83% YoY.

India’s finance minister, Pranab Mukherjee, warned recently, “there is inflationary potentiality and inflation may go up further, when it goes up it is a matter of concern.” UBS economist Jonathan Anderson backed up the finance minister saying: “Clearly the period of falling inflation is over for the emerging markets. We are at an inflection point.”

Let’s look at some sovereign CDS levels given all the growth in that part of the world. Indonesia’s CDS peaked at 1256bps on 10/23/2008; had another blip to 950bps on 11/19/2008 but has since come down to the relatively hospitable level of 172bps last night.

Thailand’s CDS followed the same multiple hump pattern date-wise; got as low as 78bps on 9/17 of this year but has risen recently touching 114bps on 10/22 before closing at 107bps last night.

South Korea also peaked shortly after Lehman’s demise (691bps), had a few more bumps on the EKG of its CDS, the highest being 481bps on 3/3 of this year and closed last night at 91bps.

Last but not least, China’s CDS chart has the Lehman blip but default protection rose in price steadily before and after September a year ago reaching a more domestically oriented peak of 268bps on March 2nd of this year. The falloff was fairly quick and while not flat lining has been range bound since May, closing at 72bps last night.

Enjoy the week.

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