Article: Asia Is Now a Zero-Sum Game By Stephen Roach
morganstanley.com
Apart from China, there is no dynamism in Asia these days. At the end of a two-week Asian tour, I am struck by a grim sense of foreboding that is evident throughout this once vibrant region. While the growth story in China is alive and well, economies elsewhere in the region are sputtering, at best. As America slows, a US-centric global economy is in desperate need of a new growth engine. That engine is not to be found in Asia.
The year 2002 has turned out to be an important stress test for a US-centric global economy. A sputtering American growth dynamic has taken a surprisingly heavy toll on the rest of the world. The reverberations have been especially acute in two key regions of the world -- Europe and Asia. Not only has the engineless global growth dynamic unmasked serious structural flaws in Euroland, but it has also revealed serious deficiencies in Asia’s externally led growth model. As I have traveled extensively throughout the region over these past two weeks, the only question that seems to matter is the prognosis for the US economy. Needless to say, my answer does not exactly provide for a very uplifting discussion.
It’s always risky to generalize about a region so diverse as Asia. There are really three distinct stories to tell in Asia these days -- Japan, China, and the rest of the region. After all these years, I continue to be amazed at how Japan still has the potential to disappoint. And yet that’s exactly what has happened to the latest reform effort. During my visit to Tokyo 10 days ago, you could literally feel a sense of movement in the air. The Takenaka effort at bank reform, in the aftermath of the Bank of Japan’s radical purchase of equities, spoke of a new potential to break a dozen years of inertia. And I fell for it. But the leadership of the ruling LDP party demonstrated once again what makes Japan’s case for reform so hopeless. Yet another effort at cleaning up the banking system was quashed by the power structure. The moral hazard of Japan’s "convoy system" emerges once again very much intact -- banks remain too big to fail, as do their zombie-like corporate borrowers. Meanwhile, the Japanese economy has taken yet another turn for the worse, as evidenced by recent disappointing trends in industrial production, inventories, employment, and personal consumption. It’s déjà vu all over again. Sadly, Japan just doesn’t seem as if it will ever get up off the mat again.
Nor is the rest of Asia (excluding China) standing on its own and resisting the pressures of a tough global climate. Korea -- where hope for vigor was highest in the first half of this year -- has suddenly slowed. Industrial output growth screeched to a near halt in September, and private consumption growth has slowed markedly; even Korean export growth has slipped from the heady gains recorded earlier this year. In Taiwan, the recent US port strike appears to have prompted some August-September gyrations; however, looking through the noise, rising unemployment and likely fourth quarter moderation in output and export growth all point to a decided deceleration of the Taiwanese economy well into 2003. Meanwhile, manufacturing output growth has slowed appreciably in Singapore and Thailand, whereas Hong Kong remains trapped by the twin forces of deflation and rising unemployment. Lacking in domestic demand, the smaller economies of Asia have little to show for themselves in the face of a US-led slowdown in external demand.
And then there’s China -- an entirely different story. In contrast to the near synchronous slowing elsewhere in Asia, the Chinese economy is on an accelerating growth path. All of the September numbers were sending unambiguous signals of a quickening of economic activity. That’s true of industrial output, exports, infrastructure spending, and foreign direct investment. It’s also true of an equally impressive acceleration in GDP growth to an 8.1% YoY rate in 3Q02 (see my October 17 dispatch, "The China Factor"). China continues to be the fastest-growing economy in Asia, or for that matter, the world. And that’s true irrespective of the slowdown in the broader global economy.
The math of China’s growth contribution underscores the key role this country is playing in driving Asian and global growth. At current exchange rates, China accounts for only about 4% of world GDP. On a purchasing power parity basis, however, that share leaps to 12%. In my view, the PPP-based construct -- which gets away from currency-induced distortions to a nation’s growth contribution -- provides a more accurate assessment of China’s role in the global economy. That’s especially the case, if you believe, as I do, that China’s currency is significantly undervalued. On a PPP basis, China is already the growth engine of Asia. While it has a share of fully 37% in pan-Asian output (including Japan, the newly industrialized Asian economies, and developing Asia), according to our estimates, it accounted for more than 65% of pan-Asian growth in 2001-02.
With GDP growth holding in the 7-8% range, China’s resilience stands in sharp contrast with decelerating trends elsewhere in Asia. And I guess that’s precisely the point. Lacking in autonomous sources of domestic demand, the Asian growth dynamic is now all about supply. And China increasingly has the scale and the scope in its production platform -- to say nothing of the cost advantage -- to win the market-share battle in the region hands down. China’s pan-Asian dominance becomes all the more apparent in the context of a global slowdown. For externally led economies, a slackening of foreign demand refocuses the growth dynamic. In the first half of 2002, all of Asia rode the tailwinds of a US-led inventory cycle. As that temporary impetus ran its course, only China has been able to hold its own. Increasingly, it’s a zero-sum game in Asia. China is now separating itself from the pack. |
