Asia must increase levels of consumer spending and capital investment if it wants to move out of the “developing” stage and play a key role in driving the global economic recovery, according to a senior ratings agency executive.
Paul Gruenwald, chief Asia Pacific economist at Standard & Poor’s (S&P), said Asian trade activity had helped boost growth as US and EU trade levels had lagged.
He said a shift towards consumption-driven trade and Asia-to-Asia capital investment would signal Asia’s coming of age, but added: “Asia doesn’t seem to be coming together.”
He told Emerging Markets the trade story in Asia was set to see a change away from processing. “Then we want to see less processing [driven trade] and more final demand. It is happening, but quite slowly.”
The growing middle class in the region is starting to play a bigger role as a new source of consumption but its contribution is not yet significant enough to drive global GDP growth on its own, he said.
China does already play a huge role in the global economy. According to a recent study by the United Nations’ International Comparison Programme, it is set to overtake the United States as the largest economy on a purchaser power parity (PPP) basis by the end of this year.
But the consumption component of China’s growth, forecast by the IMF at 7.5% for this year, is quite low. “In terms of consumption, China’s role is smaller than it should be,” said Gruenwald.
He said the main hindrance to China achieving its potential was the pressing need to rebalance its economy. With the government struggling to keep the growth momentum going, there was not the focus on reforms aimed at boosting domestic consumption.
“There [are] simply not enough resources to have a consumption boom in China,” Gruenwald said, adding that India and Indonesia were not pulling enough weight to shift the trade scales on their own.
He was also warned on the low capital investment flows between Asian countries rather than goods. While South Korea, Japan and China all had strong saving rates, they mostly bought US Treasuries and built up foreign currency reserves rather than investing that capital within Asia.
While boosting trade-driven consumption will require a long term effort to build up disposable income for the new middle class in the region, resolving the Asia financial integration conundrum may be easier to achieve.
“Japan has huge [international] investment positions, possibly the biggest in the world, but only 10% of those are in Asia,” said Gruenwald. “As a measure of economic maturity, you need cross-border financial flows.”
Solutions include harmonising tax and accounting treatments, as well as simplifying the regulatory framework surrounding non-FDI capital investments.
Gruenwald again singled out China as in need of reform. “China is a huge force, but in terms of financial flows, except for their purchases of US Treasuries, their role is quite small.”