ASIAN GROWTH: Requiem for a dream

The idea southeast Asia can grow without retooling its export-led economy is fantasy

  • By Eric Ellis
  • 09 Oct 2010
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Managing expectations: Container
terminal in the port of Dalian, China 
To many, Asia represents the saving hope for the world economy. The region’s economies have vastly outpaced those of the debt-burdened west, bouncing back with enviable vigour following the global crisis. Financiers are now betting that, thanks to Asia’s resilience, the global economy will withstand another slump in the west.

Inventory restocking, fiscal stimulus and a pick-up in exports, albeit from a low base, have boosted growth across the region in recent quarters. The Asian Development Bank now predicts Asia will grow 8.2% this year, revising its 7.5% forecast in April.

But amid the euphoria over the region’s seemingly unstoppable rise, a growing number of experts is sounding the alarm. For a start, they point out that the collapse in western demand in 2008 led swiftly to a precipitous drop in Asian exports – a fact laid bare the deficiencies of the region’s growth model. This model – where growth depends principally on exports – has barely changed post crisis.

“Asian countries should pursue another development model based on domestic demand and regional demand, rather than external demand, particularly markets in the US and Europe,” Asian Development Bank president Haruhiko Kuroda said recently. Given subdues demand in the west, “Asia as a whole cannot expect such rapid growth in exports” for the foreseeable future, he said.

But the worry is that Asia’s policymakers are still clinging to the belief there is no need for adjustment – that the region can return to the pre-crisis dependence on exports as the primary growth engine, a strategy that has served the region so well in the past.

“The general mentality is that we will pick up where we left off,” says Michael Spencer, Deutsche Bank’s chief economist from Asia. “I doubt that will happen.”

“For many countries in Asia, this was the most severe, the sharpest recession ever experienced,” he says. “It was fairly short but that doesn’t mean that everything just returns to what it was and we live happily ever after.

“Most policymakers haven’t woken up yet. They are just kidding themselves if they think it’s business as usual, that this was just a blip and things will go back to the export boom before 2008. The demand isn’t there. It’s a new reality and will be so for longer than they care to believe.”

Jonathan Anderson, UBS’ chief emerging markets economist, expresses a similar sentiment: “There is a palpable sense of complacency in Asia –and a rather disturbing air of self-congratulation. After the 2008 financial crisis, policymakers have been high-fiving each other that their economies didn’t fall apart.”


What’s required now is a sea change in policy, analysts say. Following the Asia crisis, authorities looked to a jumpstart a capital exporting model, which relied on export-led growth supported by undervalued currencies and external trade surpluses. Investment concentrated on tradeable goods rather than domestic consumption. Meanwhile, Asian central centrals stockpiled vast quantities of foreign exchange reserves – principally through buying trillions of dollars of low-yielding US Treasury bills — to prevent their currencies from rising.

China is the most explicit example of this model, but fixing exchange rates to support export competitiveness remains widespread across much of southeast Asia. Notable exceptions are India and Indonesia, which benefit from thriving domestic markets.

Despite the ADB’s optimistic forecasts for Asia as a while, the bank says China’s average annual growth rate could halve over the next two decades as investment wanes. It projects 5.5% annual Chinese growth for the 20 years to 2030, compared with 9.% between 1981 and 2007 and a forecast 9.6% this year.

Chinese policymakers have long talked of the need to rebalance growth away from exports and towards private consumption. But so far the ability of China to increase domestic private demand – and rely less on net exports – has been severely limited. Weakness in net exports at a time when domestic private demand cannot grow fast enough is also likely to limit China’s economic recovery.

“For China, economic rebalancing very specifically means raising the GDP share of household consumption from its astonishing low level of 36%,” says Michael Pettis is a finance professor at Peking University . “Low household consumption is mainly caused by the very low GDP share of Chinese household income, so the key to rebalancing is to get household income in China to rise faster than GDP.”

ADB chief economist Jong-Wha Lee has pointed out that rebalancing growth demands a “judicious mix of policies” to build strong domestic demand and apply resources more efficiently. They include: a focus on strengthening domestic consumption; improving the investment climate and social infrastructure; accelerating financial development; and strengthening regional integration and cooperation.

But while talk of such a deeper structural shift is now commonplace, putting theory into practice is less straightforward.

Still, a growing number of Asian economic policymakers are pointing their countries toward China. In Jakarta, Gita Wirjawan, the cabinet-level chair of Indonesia’s National Investment Development Board and former head of JP Morgan in the country has spent his first year in office shuttling to Beijing to see how the two countries can work together. Corruption, Indonesia’s long-time impediment, isn’t so much the issue, Wirjawan says. It’s more being able to guarantee supply of materiel to feed the insatiable China beast.

“This year we are embarking on a massive infrastructure drive,” Wirjawan tells Emerging Markets. “We have the things that China wants, and we have them cheaper than other places China does business with. We need to be able to get them out of the ground and to the ports more efficiently.”


In the short-term, Asian economies, principally China, face overheating risks following unprecedented pump priming to compensate for the slack in external and domestic demand. China’s $600 billion economic stimulus programme in 2008, designed to head off trade shocks in the wake of the subprime crisis, has left something of a hangover.

In some respects, says Deutsche’s Spencer, the package seems to have worked too well: China’s economy roared back amid a surge in credit, but Beijing has since been forced to pare back some of the excess – tightening regulation and raising interest rates – to curb lending as fears grow over a bubble in an already-overheated property market.

Yet financial markets by and large dismiss such fears. Tim Condon, Asia chief economist for ING Bank, says: “The signs say soft landing in China. Asia, in general, is in pretty good shape. If anything, significant economies here are under-performing. It’s not as if China is going into recession. We are talking high single-digit growth and the policymakers seem to have it in hand.”

Huge swathes of investors are betting that Asia is both insulated from a drop in US economic output and successfully making concerted efforts to find new sources of demand. At Aberdeen Asset Management, Bangkok-based economist Ratanawan Saengkitikomol says that Asia could withstand another economic downturn in the West.

“A G-8 double-dip recession would certainly impact headline Asian growth,” she says. “But Asian trade surpluses have been falling, reflecting the fact that Asian domestic demand is growing faster than external demand. It shows that Asian economies are becoming less dependent on the developed countries.”

Ratanawan says that hardier fundamentals underpinning Asian economies are leading to a sharp V-shaped recovery that investors should heed.

Condon looks to South Korea, arguably Asia’s most export-dependent economy, as a case in point. Korea, the world’s 12th-biggest exporter, Condon says, is a “solid single-A credit economy”.

Its performance in the face of turmoil among its major trading partners has been impressive. Despite exports slumping by 18% in the first quarter of 2009 when GDP growth hovered around zero, Korea jumped back to solid growth in the following quarter. It has done relatively well since, despite (inaccurate) forecasts from the government and central bank that its economy would contract for the first time since the region’s financial crisis in 1998.

The Bank of Korea continues to keep rates near record lows (2%-2.25%) and the IMF has lifted its GDP forecast for 2010 from 5.7% to 6.1%. Condon says Korea is not China but, nevertheless, “is set to join the world’s major super-rich economies”.

Perhaps unique in Asia, India’s economy is expanding at a fast clip more or less irrespective of China. A recent survey of the region’s economists by Reuters forecast India would grow by 8.4-8.5% through 2010 to 2012, up from 7.4% in 2009-2010, mostly thanks to rampant consumer demand at home.

Condon likes the India story, which is unusual to much of Asia in that expansion is more bottom up than top down; that is, driven more by domestic consumption and investment. “It’s one of the most exciting economies in the world,” he said.

Across ASEAN, Condon describes Indonesia as an “underperformer”. South-east Asia’s biggest economy runs along at 5.5-6.5% growth, which is the level the government is required to sustain jobs. Condon says: “It is as if they have imposed a speed limit. I don’t see any reason why Indonesia can’t bump growth up to 8%-9%, spend some money on their infrastructure and emphasise the non-manufacturing side of the economy.”

  • By Eric Ellis
  • 09 Oct 2010

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 Citi 244,235.70 910 8.87%
2 JPMorgan 223,767.95 1021 8.13%
3 Bank of America Merrill Lynch 211,276.97 750 7.68%
4 Barclays 166,062.82 634 6.03%
5 Goldman Sachs 162,877.27 537 5.92%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 HSBC 25,202.67 100 7.14%
2 Deutsche Bank 25,125.19 81 7.12%
3 Bank of America Merrill Lynch 21,836.07 58 6.18%
4 BNP Paribas 18,395.95 105 5.21%
5 Credit Agricole CIB 18,048.72 104 5.11%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 JPMorgan 12,578.87 55 8.17%
2 Citi 11,338.07 71 7.36%
3 UBS 10,682.06 44 6.93%
4 Goldman Sachs 10,419.53 53 6.76%
5 Morgan Stanley 10,194.88 57 6.62%