Global: Asia Musings, by Stephen Roach (New York)
Nov 14, 2003
Of all my treks to Asia over the years, my latest one made the deepest impression. And I’m not just referring to a bad case of jet lag. In one sense, two weeks in the Far East barely scratches the surface of this diverse and complex region — a region that accounts for fully one-third of global output (as measured by the IMF’s purchasing-power-parity metrics of world GDP). But in our world of mad dashes, I’ll take what I can get. This was a great time to take a deeper look at Asia. In my view, the region is at a critical turning point. It is only now getting over the shock of the devastating financial crisis of 1997–98. Always in search of the ultimate model for development and prosperity, Asia has found yet another new way. But it’s a recipe that raises as many questions as answers.
The New Asia is all about China. Japan, with a per-capita GDP that is about 40 times that of China, has all but abdicated pan-regional leadership to China. The rest of the region is overwhelmed by the sheer size and scope of the Chinese economy — to say nothing of the rapid transformation from a centrally-planned to a market-based system. China has become a magnet for foreign capital, much to the dismay of other Asian economies; foreign direct investment into China hit a record US$53 billion in 2002, whereas FDI flows elsewhere in the region have remained at relatively depressed levels since the Asian crisis. At the same time, China’s powerful growth dynamic has now been transformed into an engine of pan-regional growth for the rest of Asia. In the first eight months of this year, fully 73% of Japan’s total export growth went to China; for Korea, the share was 40%, and for Taiwan it was 99%. Even for the more diversified and smaller ASEAN economies, exports to China accounted for between 20% and 30% of total export growth in the first eight months of this year. Largely lacking in domestic demand, an externally-driven Asian economy has become increasingly dependent on Chinese trade as a major source of growth; that’s great when China is surging to the upside, but it’s a perilous course when China slows — precisely our concern in the first half of 2004 (see my November 4 dispatch, “China Pull”).
But there’s far more to a new China-centric Asia than just the latest numbers. It’s now in the body language of the region. The fate of the America consumer used to be at the top of the agenda in my discussions with Asian investors, businessmen, and public officials. That’s no longer the case. The China story is the only real topic of intense discussion these days. Nowhere was this more evident than at the recent Boao Forum for Asia — a new Asian summit that I attended that has been set up in the spirit of the World Economic Forum in Davos and intended to bring the region’s leaders together for collective engagement over common problems and policies for the future. As I saw it, Boao still has a long way to go in establishing a Davos-like intensity to the debate. But the footprints of China were everywhere. That’s not just because the conference was held in an extraordinary new facility on China’s Hainan Island, but mainly because every topic of discussion — from regional bond markets and trade cooperation to Asia’s technology and energy policy — ended up having a China-specific answer. From my perch, the Boao Forum came pretty close to offering a formal validation of Asia’s new China-centric growth model.
From Hainan, I went on to Singapore. What a contrast — emerging China versus the established wealth of one of modern-day Asia’s greatest miracles. I had the opportunity to spend some time with Lee Kuan Yew, the founder of modern Singapore and one of the giants of Asia. Over the past few years, I have had the pleasure of meeting several times with the Senior Minister, as he is known in Asia. He is getting on in years but you’d never know it from the probing mind and the intensity of engagement. He is a deep and provocative thinker — up to speed on everything from American politics and Iraq to China and Islam. He, too, was fixated on China. At a dinner speech at a conference we sponsored in Asia, he posed a powerful rhetorical question, “I often ask myself what would have happened to Asia had China not gone Communist?” His answer startled all of us. Lee Kuan Yew admitted that nearly 50 years of Chinese isolation was almost a gift to the rest of Asia — providing, in effect, a window of opportunity for the region to develop and prosper without interference from the “sleeping giant.” Self-effacing as ever, Singapore’s Senior Minister took no credit for the miracle that occurred on his watch. Had China gone the other way, he suggested, the rest of the region would have had a much tougher go at it. Now that this hiatus has ended, the good news is that the region is better prepared to cope with China. But Lee Kuan Yew ended on an introspective moment. He wasn’t certain how that coping would occur. He worries a lot about what the rest of Asia can now do for an encore — now that China has awakened. He doesn’t have an answer to what could be Asia’s toughest question of all. And that clearly bothers him.
Japan seems bothered by very little these days. The mood is better than I have seen it any point in the past five or six years. Cyclical recovery helps, but, of course, post-bubble Japan has had several false starts over the past decade. Japan’s sharply rising stock market has certainly added to the upbeat tone. And Prime Minister Koizumi’s recent political triumphs have also instilled a greater sense of confidence in Japan’s willingness to get on with the heavy lifting of structural reforms. But this mood could be more fragile than it appears on the surface. In the past three quarters, capital spending has accounted for the bulk of Japan’s domestic demand growth; however, for an economy still in deflation and, therefore, awash in excess supply, a sustainable capex-led growth dynamic seems problematic. Moreover, the bulk of the Japan’s recent export dynamic has been driven by China. That suggests that the recent improvement in the Japanese economy has been largely a very China-centric development — an outcome that is seriously at risk if China now slows, as we expect.
For some time, I have stressed the point that the world doesn’t “get” China. After my latest trip to Asia and a few days of re-entry back into the US, I feel more strongly than ever about that view. The world sees China’s rapid growth dynamic as a sign of strength — even as a threat, according to the political rhetoric spewing forth from the US Congress. In the eyes of the West, the major risk to China is a dysfunctional banking system and its massive overhang of nonperforming loans. Inside of China, perceptions are very different. Vigorous growth is an outward manifestation of progress on the road to reform — and of China’s success in using that growth to absorb the 6–8 million workers that are displaced annually by these reforms. This extraordinary flux in the labor market underscores China’s biggest internal risk — social instability. In my view, China’s rapid growth dynamic is aimed first and foremost at containing that risk. So are its stabilization policies — fiscal, monetary, and yes, even currency policies. There is no room for a serious accident in a nation that worries constantly about social instability. In an effort to avoid such a hard landing, China is currently coming to grips with the excesses of a credit binge and a property bubble; its central bank has tightened, bank lending has started to slow, and the economy should follow. This is exactly what China needs, but it could prove to be a formidable challenge for an increasingly China-centric Asia.
As I left Asia last week, I was struck with a pervasive sense of complacency — everywhere in the region except China. There is a widespread presumption that there is nothing but upside to the region’s China-centric growth curve. As always, the biggest challenges seem to be coming at a time of maximum bullishness. |
