China Can't Shield Asia From a U.S. Slowdown Yet: William Pesek
By William Pesek
Aug. 25 (Bloomberg) -- It's the most tantalizing question in Asian economics: When can the region stand alone from the U.S.?
The world's biggest economy is the dominant trading force. Sure, China is booming, India is catching up and growth remains strong in Southeast Asia. Yet the region is thought to be doomed if the U.S. falters.
The numbers tell the story. China's economy is less than one-fifth as big as the U.S.'s. Toss in India and the rest of Asia -- excluding Japan -- and we're still only talking about less than 40 percent of U.S. gross domestic product. Also, much of the region is running trade surpluses, meaning their economies are demanding less than they're producing.
And so, it would seem to follow that if the U.S. slows significantly, so does Asia.
Not so fast, says David Carbon, an economist at DBS Bank in Singapore.
Carbon argues the impact of a U.S. slowdown will be ``less than one would think, and certainly less than in the past.'' Yet it's his take on Asia's exponentially increasing role in the global economy that may come as a surprise to many.
The basic gist of Carbon's argument is that in five years' time, domestic demand in Asia will outstrip that of the U.S. The reason: Asian economies are booming, rapidly integrating and their young, growing populations will support strong growth.
``We're definitely on the cusp of a big handover in terms of who drives global growth,'' Carbon says. ``It's looking us square in the face. Funny nobody sees it.''
Chinese Buffer
While Carbon's view is contrarian, it's striking to see how views in Asia are evolving with regard to a U.S. slump. ``The impact on Asia should be less this time around because of China,'' says Callum Henderson, global head of currency strategy at Standard Chartered Bank in Singapore.
Luz Lorenzo, an economist at ATR-Kim Eng Capital Partners Inc. in Manila, adds: ``Undoubtedly, growth will slow as Asia's economies are export-oriented and biased towards the U.S.'' But, she says, Asian economies have diversified away from electronics, partly because of the commodities boom. Also, there's China's robust growth, and don't forget Japan, which is finally waking up. ``So,'' Lorenzo adds, ``there are some buffers for Asia.''
Is Chinese growth, coupled with Asian demand, really a replacement for the U.S.'s $12.5 trillion economy? Personally, I'd say not yet. While it's certainly possible that Asia will surpass the U.S. in economic influence, there are some things to keep in mind.
Asia needs the U.S. in the short run. In order to continue integrating to create a European-style single market and maintain strong growth, Asia will require considerable political will. Such resolve will only be possible if the region continues to expand rapidly. A U.S. slowdown may dent that political will.
Some Support
In this debate, all eyes tend to fall on China. Here, it's important to remember that Asia's developing economies are relying on another developing economy. China's rise simply isn't stable enough or of significant magnitude to play the role the U.S. currently does in Asia, or the one Japan did before it fell into the deflationary isolation of the 1990s.
China's $2.2 trillion economy is loaded with risks ranging from a rickety financial system to rampant pollution and social instability. And then there's the symbiotic relationship that exists between the U.S. and China. The 11.3 percent growth that China recorded in the second quarter is setting off alarm bells in Beijing, and officials are trying to calm things down. Even louder bells may ring if a U.S. slowdown slams China.
Feeling Pain
For now, China is at best a support for Asia and will come in handy if the U.S. weakens. Someday, China may have the booming domestic market that will allow it to become Asia's economic engine; it doesn't yet exist.
Tao Dong, chief Asia economist at Credit Suisse Group in Hong Kong, offers an interesting factoid: China's demand is geared toward material and machinery industries. That benefits economies outside the region more than in Asia, with Japan and South Korea being possible exceptions.
``A large part of the electronics Asia sells to China is eventually heading to the U.S. market,'' Tao says. ``So, when the U.S. slows down, Asia will feel the pain.''
Wherever one stands on the ``Is-China-replacing-the-U.S.?'' debate, it's clear the months ahead will be a big test for Asia. The question is how much progress it has made in withdrawing from its dependence on exports. After the 1997 financial crisis, Asian governments dutifully tried to do just that. More recently, they have reverted to holding down currencies to boost exports.
``Despite the continued momentum in China, a sharp slowdown in the U.S. probably would translate into an export-led slowing in many Asian economies,'' says David Cohen, director of Asian economic forecasting at Action Economics in Singapore.
The economic future may indeed be Asia's. The irony is that the region may have a hard time realizing it without help from the U.S. in the short run.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net . |
