While Many Countries Must Borrow, China and Japan Can Fund Their Own Stimulus

Includes: CAF, EWJ, FXI
by: Joseph Trevisani

The Philippines, Malaysia, Thailand and Indonesia are the middle men in the export production chain. In consumer electronics for example, they build the components for products designed in Japan or Taiwan and assembled in China for final export.

The world economic slowdown, which began in earnest last September, may take time to fully reach the economies of the component manufacturing plants. But the effects of the slowing world economy are being registered here also: Indonesia and Malaysia expect GDP growth this year to be the slowest since 2001; Thailand’s government says recession this quarter is possible; the Asian Development Bank sees Philippine GDP down from 4.3% in 2008 to either 3.4% or 2.3% in 2009 depending on the depth of the recession.

Japan, Taiwan and Korea tend to export higher value products like cars, high end electronics and heavy machinery. Consumption of these items is relatively elastic and subject to the rapid demand destruction taking place in the in the importing countries. Negative GDP began in Japan in the second quarter of 2008 and is expected to continue though at least mid year 2009; the Taiwanese cabinet approved an economic plan aiming for 5% annual growth from 2009 to 2012 but private estimates anticipate GDP to be a far more anemic 0.5% for the year with negative numbers in the first and second quarters. The Korean Finance Ministry predicts a 3% expansion in 2009 but private estimates from the World Bank and the International Monetary Fund are one third lower at 2% and some others envision a 3% contraction.

China is a case by itself, made so by its size, the dynamism of its economy, its huge trade surpluses and its authoritarian political system. China’s finished exports are relatively low value goods whose consumption is less elastic by nature and so less likely to suffer drastic declines in purchases like the auto exports and plasma screens of Japan and Korea or the assembly components of Malaysia and Thailand.

The Chinese government has estimated that 8% yearly growth is necessary to absorb the new workers entering the job market. A government associated research center is predicting a 10% GDP increase in 2009 but that is higher than most. The World Bank predicts 7.5% and some private estimates are as low as 6% and even 5%.

With its history of domestic unrest and the anniversary of Tiananmen Square later this year, the Chinese government will not want to take chances with unemployed worker unrest. With debts only 18% of GDP and a huge cash surplus, the Chinese government will try to keep GDP above the 8% threshold. As this growth will come from a boost in domestic consumption it will draw in resources and components from the rest of Asia. This may help Asia’s satellite economies and could put China and Asia on a more self determined path to permanent growth.

Asian economies have two advantages over their counterparts in the west, even with the decline in world trade and exports. First, they are large consumers of raw materials and will benefit from the profound fall in commodity prices. And second, they have relatively low debt and so have more room in public finance to fund their own domestic stimulus. Asian countries have historically been high saving countries. This gives them a distinct advantage in weathering the recession.

China, like Japan can afford to fund its own stimulus without recourse to world financial markets. Though it is debatable how much of China’s proposed $585 billion stimulus will actually reach consumers through wages and rebates, what is not questioned is the surplus that will fund it.

The rich world from Great Britain to the EMU and the US is set to borrow unprecedented amount in the world financial markets to stimulate their economics. If Asia’s emerging economics do not have the cash on hand to stimulate their own they will be hard pressed to sell their bonds and extend their current debt. The Asian economies that will fare the best in 2009 will be those with the greatest ability to stimulate their own economies without borrowing from the rest of the world.

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