Are Asian Markets Strong Enough to Withstand a Protracted U.S. Slowdown?

Notes from Dr. Enzio von Pfeil’s upcoming appearance on News Asia:

Enzio, some say China has become more dependent on exports to the US and Europe. Do you agree? Is China vulnerable to a slowdown in the US economy?

• Without a doubt, China is very dependent on her exports to America and to Europe
• So, in the short term, China is affected by slowdowns in America and Europe by way of exporting less to these places. Besides, if the US market crashes, then expect that to affect the psychology of ALL investors: we don't buy the myth of de-coupling, at least in the short term.
• However, does this make her “vulnerable”? I am not so sure. The key is that private consumption accounts for 2/3 of China’s economy, and a large part of this is driven by fixed asset investment and urbanization. Of course, China grows less quickly if her exports slow, but with the domestic part of demand increasing strongly, and especially ahead of the Olympics, I would not subscribe to the word “vulnerable”, at least in the longer term.

Can China offer extra momentum to offset US economic weakness?

• No. It is a myth that China, with one fifth of America’s per capita income, can offset the power of the American and indeed European economies.
• A case could be made that strong Chinese growth, as well as a stronger RMB make imports from the USA with her weakening currency more attractive, but I am not too gung-ho on this “the only thing that drives trade is the exchange rate.”
• If the yuan keeps rising too fast, then exporters will be hurt by costing more to overseas customers and by a worsening of The Economic Time in America and in Europe.
• So they would do better by priming the fiscal pump, as in: urban renewal, build up for the Olympics. Their monetary policy is loose enough.

Some economists point out that Chinese companies might try to make up for a shortfall in exports by selling their products locally. That, in turn, will reduce demand for Asian exports. Are you noticing this trend too?

• Export markets differ strongly from domestic ones: the demand structures often are very different.
• Also, why raising domestic sales reduces demand for exports to overseas countries beats me.
• On a macro level, of course, companies that previously relied on exports can try to sell more domestically – but the economics of this are vastly different.

Are Asian economies fundamentally strong enough to withstand the effects of a protracted US slowdown?

• The Economic Time™ is pretty good in places like Korea, India, Hong Kong and China. But we advise clients NOT to buy these markets until the US stock market has cracked.
• Yes, all are fundamentally strong enough – in the longer term – to withstand a US slowdown. However, as we mentioned above, in the short term, any US slowdown will hit the psychology in the “real” exporting economy, as well as in the financial markets. At least in the short term, then, "things" are not so different this time.

What about the more open economies like Hong Kong and Singapore?

• Singapore’s problem is always that it’s the nice house in the bad neighborhood. Witness the political undulations returning to Malaysia…
li Clearly, we in HK are the water skier attached to the back of the Chinese speed boat, one that we think will continue racing along, thus dragging us with it.

In your view, is there room for domestic policy response in Asia to counter the effects of any slowdown?

• Yes. You can loosen monetarily by pushing the foreign exchange rate down and selling more domestic currency into the market. Or on the fiscal side you can cut taxes or increase spending.

Comments

[Kripalani:]

You have left India out of the discussion.. How will India be affected if usa Markets slide?

2007 Dec 19 03:54 PM

[sasian:]

Sain.. He just said there will be initially a set back and then it will mend.. but wait for the crack first..

2007 Dec 19 09:27 PM