China freezes, Asia catches cold
By Alan Boyd
SYDNEY - Corrosive oil prices, faltering US demand and investment curbs in China are starting to show up in economic data, forcing lower quarterly growth throughout Asia and confronting monetary chiefs with some awkward questions on interest rates.
Of these three interlinked challenges, the Chinese crackdown is the one causing most uncertainty among central banks as the region's economic powerhouse enters largely unchartered territory following a decade of vigorous expansion. A progressive monetary tightening, targeted especially at the overheated construction and real estate sectors, has had a dampening effect on urban fixed investment, according to the National Bureau of Statistics in Beijing, with October data showing a 15.3% decline since the first quarter. Investment growth in the steel and cement industries dropped by 65.5 and 43.4 percentage points respectively, while real estate investment fell by 12.8 percentage points.
Chinese export orders have also started to ease as higher oil prices erode consumption in key Western and Asian markets, triggering factory cutbacks. Industrial output in August grew by 0.4% from September and was 1.2% down on the same period in 2003.
Imports will be the next to level off after China's decision to boost interest rates, for the first time in nine years. Consumer goods and manufacturing equipment, which comprise two of the biggest shipment segments for other Asian states, will take a big hit. Much of Asia will rely more heavily on export revenues as domestic consumption begins to taper off in response to higher oil prices. Although the cost spiral has ended in global markets, it will be months before inflationary pressures subside and consumer markets recover.
In India, the Finance Ministry has reduced the official growth forecast to a range of 6-6.5%, down from 7%, because of the surge in crude prices and an unsettled monsoon season. About 65% of India's crude oil is imported. Gross domestic product (GDP) grew by 7.4% in the first quarter but has since fallen. Wholesale prices soared to 8.74% in August, the highest level since the middle of 2001, and further increases are likely following a fuel price hike by state oil marketing companies in early November.
Japan, almost totally dependent on imported fuel, reported growth of just 0.1% between July and September, prompting a downgrade by the central bank and casting further doubt on its much-trumpeted recovery from years of stagnation. Export earnings are weakening as regional demand wanes and Japanese competitiveness is undermined by the yen's steady appreciation against the dollar. Many of Asia's currencies are either fixed to or loosely aligned with the greenback.
South Korea's economy expanded by a slower rate of 4.6% year-on-year in the third quarter, down from 5.5% in the previous three months, with the government blaming weak consumer spending and lower export revenues resulting from the oil spiral. On a seasonally adjusted basis, GDP rose by a mere 0.6%, the smallest increase for 12 months. Much of the lost export income can be attributed to a 12% appreciation of the South Korean won since the start of the year.
Singapore, another net oil importer, recorded a sharp slowdown in the third quarter and immediately cut its growth forecast for the entire year to a range of 8.0-8.5%, a reduction of 0.5%. According to the Trade and Industry Ministry, GDP rose by 7.5% year-on-year between July and September, compared with 12.5% in the second quarter. On an annualized basis, growth dropped by 3%, though the economy still expanded by 9.1% in the first nine months because of a low base in 2003.
Elsewhere, crude exporters Indonesia and Malaysia have warned of weaker export demand despite higher oil receipts, and growth forecasts have been lowered in Thailand and the Philippines. Pakistan reported a 10.4% drop in dollar export earnings during October compared with September.
Chances of import demand from China and the United States recovering before the second half of 2005 are slim as the macroeconomic response to China's widening current account surpluses - already a source of considerable diplomatic tension with Washington - will reverberate through the region. While Beijing can be expected to loosen the yuan's ties with the dollar and allow its exports to appreciate slightly against shipments from other low-cost Asian producers, the US Federal Reserve has signaled its intention to maintain a weak exchange policy. In any case, there is a likelihood that the dollar will be depressed by a pullout of Japanese capital as that country's growth declines.
At the same time, China's domestic-policy response will make its own market less accessible. The central bank has indicated it will continue to take the heat out of bank lending growth, especially for consumer imports, most probably through a series of small interest-rate increases.
For monetary chiefs elsewhere in Asia, the dilemma is how to keep their currencies competitive in the face of these constraints without overreacting to the inflation threat and choking off what remains of domestic demand. Although there is an established tradition of intervening in exchange markets to prevent appreciation, big oil importers such as Japan, South Korea, Thailand, Singapore and the Philippines need strong domestic currencies so they can fill their energy quotas.
As a possible reflection of this paradox, interest-rate policies have followed an erratic path, though only a handful of countries are likely to resist the global pull toward monetary tightening once the impact from oil prices becomes less pronounced. The most likely formula is a mix of fiscal and monetary measures that can prick the inflationary bubble without hurting core growth prospects. But so far, there has been little policy consistency.
India has slashed import duties on petroleum, steel and edible-oil products but raised two key lending rates, including the repurchase rate charged to banks, to help absorb excess consumer credit. Thailand has twice raised prime lending rates since September while tightening access to consumer credit, enforcing prudential banking regulations more closely and cooling the rampant real-estate sector. Taiwan has also lifted interest rates.
However, South Korea's central bank went in the opposite direction, reducing taxes and offering cheap refinancing to debtors, but simultaneously lowering its benchmark interest rate to a record low for the second time in three months. They may all have gotten it wrong: warning against an overreaction, the International Monetary Fund has suggested the central banks bide their time until the growth trend becomes more apparent.
But that might not be until well into the first quarter of next year, leaving little time for monetary chiefs to respond if it all goes wrong. In the meantime, they might be better off looking to Beijing for guidance on where the regional economy is heading.
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