The Chance to Make a Difference
Lee Kuan Yew 12.08.08
Sees this as a defining moment for Asia.
After the dramatic drops in the New York Stock Exchange following the collapse of Lehman Brothers, stock markets and property values in eastern Asia declined significantly. China's Shanghai index has fallen about 70% this year. Property prices have also dropped, varying in levels among different cities. Visiting Beijing and Shanghai in late October, I found political leaders and businessmen were apprehensive about the coal and iron ore stocks piling up at their wharves as export demands fell.
Asian banks have not been snagged by dealing in securitized derivatives they didn't understand. Their bankers learned their lessons from the 1997 Asian financial crisis. The fundamentals of eastern Asia's economies are sound. With the exception of South Korea, eastern Asia's central banks have substantial foreign currency reserves, limited leverage and low indebtedness, so their governments have the flexibility to use fiscal policies to promote growth and recovery.
China has the largest reserves, with about $2 trillion--$500 billion in U.S. Treasurys and $1.3 trillion invested in U.S. assets. Interbank lending in China continues. However, China's banks have become cautious and lend only to high-quality companies.
As long as the banking systems of the major economies don't freeze up, eastern Asia, led by China, will resume growth earlier than other regions. On Nov. 6 the IMF forecast China's growth at 9.7% for 2008 and 8.5% for 2009 (down from 11.9% in 2007), and India's at 7.8% and 6.3%, respectively. Both nations' fundamental growth drivers are increasing labor productivity, urbanization and the growth of capital stock. The IMF's forecasts for developing Asian countries in 2008 and 2009 are 8.3% and 7.1%.
China's inland provinces need infrastructure, and Beijing has announced a stimulus package of 4 trillion yuan ($586 billion) by 2010. China is extending its railway network, rebuilding earthquake-damaged areas in Sichuan, increasing export tax rebates, lending more to small and medium-size enterprises and spending more on social welfare systems. To revive the housing market, it is reducing taxes on housing transactions and unwinding property-tightening measures introduced earlier to counter speculation. For first-time home buyers the minimum down payment has been reduced from 30% to 20%, and banks are allowed to offer interest rates as low as 70% of the standard lending rates for such mortgages. The demand for residential housing remains strong, and China's construction companies are capable of meeting it.
Personal consumption in China should be encouraged; it is only 35% of GDP, compared with America's 70%. Beijing is introducing rural land reforms, increasing government funding for low-price housing and basic medical services, and reducing interest rates in order to boost domestic consumption. China is determined to grow by at least 8%, to create enough jobs to sidestep large-scale unemployment and social unrest.
Shanghai and Guangdong, two major exporting provinces, are experiencing declines in export orders.
The ten countries in the Association of Southeast Asian Nations (Asean) have free trade agreements or comprehensive economic partnerships with China, India and Japan. Asean's growth for 2009 is projected to be between 2% and 5%, depending on how heavily each country relies on exports to the U.S. and the EU. Singapore, whose external trade is more than three times its GDP, will dig into its reserves and survive the downturn because of its economy's strong fundamentals.
Intraregional linkages that have increased during the past two decades will help fuel growth. They will partially offset the reduced demand from the U.S., the EU and Japan, and will buffer eastern Asian countries against a severe recession.
Defining Moment for China and India
China's economy will continue to grow. Its leaders have stated that the best contribution they can make to offset the current crisis is to keep their economy growing. They can go beyond that by constructing positive policies and not shifting out of U.S. assets or pushing exports via competitive devaluation of China's currency. If China plays an active part in multilateral measures to help alleviate the global crisis, it will be seen as a responsible stakeholder whose rise will strengthen the world's financial system. The signs for this are good. On Oct. 21 in New York, Treasury Secretary Henry Paulson said: "It is clear that China accepts its responsibility as a major world economy that will work with the United States and other partners to ensure global economic stability."
India's foreign reserves--$251 billion--are modest compared with China's. India's stock market is 50% below its January levels. The government can cede needed infrastructure projects for roads, railways, container ports and airports to Korean, Japanese and other international companies, which would increase foreign investment in India. If party leaders can overcome interparty politicking when deciding on policies to strengthen their economy, India will be in a position to make a difference internationally. Its leaders have demonstrated that when India musters its resources for strategic projects, such as its moon-probe rocket, it can succeed.
But the health of the U.S. economy is still a major factor in global growth. The economic policies of President-elect Barack Obama will determine how long the global economy takes to recover.
Lee Kuan Yew, minister mentor of Singapore; Paul Johnson, eminent British historian and author; Ernesto Zedillo, director, Yale Center for the Study of Globalization, and former president of Mexico, rotate in writing this column.
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