Asian nations will discover how much they need the US
By Keith Bradsher
deccanherald.com
With stock markets plunging around the world because of financial worries clearly marked made in USA, and with growing concerns about an economic slowdown in the United States, Asian countries may soon discover whether they really are ready to cope with a diminished US role.
With stock markets plunging around the world because of financial worries clearly marked “made in USA,” and with growing concerns about an economic slowdown in the United States, Asian countries may soon discover whether they really are ready to cope with a diminished US role.
Countries in the region, particularly China, increasingly have chafed in recent years at their dependence on the United States, including the enormous demand of its consumers for imports, the dominance of the dollar, the pervasive presence of US financial institutions. Fundamental economic changes do seem to have limited somewhat the region's need for US consumers and financial markets, although the dependence remains considerable, business executives and economists agree.
“Definitely the reliance on the US economy, particularly from the Asian economies, has lessened a bit over the last 5-7 years,” said Sanjay Mehta, the Chief Executive of Essar Shipping and Logistics, an Indian shipping company. “There will be an impact, but less of an impact than we saw in 2001 and 2002 when the Internet bubble crashed.”
Many in Asia have been taking pride until lately in the extent to which the region has seemed to be weaning itself from reliance on the US. At the Canton Trade Fair in April, executives from across China were enthusiastic about sales prospects in Europe, as Chinese exports to Europe surpassed its exports to the US in February.
In Baharbari, a village in northeastern India, most of the young men have left for jobs on housing construction sites in northwestern India, part of a broader boom in domestic demand across much of Asia. And in Bangkok, cement executives like Prachai Leophairatana exude confidence when talking about exports to Vietnam, part of a surge in commerce among East Asian nations that has made the region the world’s fastest-growing centre of trade.
When the US suffered its previous slowdown six years ago, Asian exports went from 25 per cent growth in 2000 to a 15 per cent drop in 2002. But part of that plunge reflected the weakness of European and Japanese economies then, and these economies appear much stronger now.
Poor governance
The spreading debacle in the US seems to have damaged the country’s image as a model of corporate governance and effective government regulation, and made Asian companies and regulators look more competent than they seemed a decade ago. During the humiliation of the Asian financial crisis in 1997 and 1998, the “tiger” economies of Southeast Asia proved to be paper tigers with poor corporate governance and uncontrolled borrowing.
Now the US has the economy where financial regulation seems to have been weak and where consumers and businesses alike borrowed with little restraint. Even a modest downturn in housing prices in the US seems to have hurt well-known American institutions like Bear Stearns.
By contrast, real estate prices in Hong Kong plunged by two-thirds from 1997 to 2003, but the city’s banking industry remained solidly profitable throughout thanks to tough regulations that prevented banks from lending more than 70 per cent of the value of a home.
The International Monetary Fund forbade Southeast Asian nations a decade ago from seeking economic recovery by closing their markets, but many business people in China now see the US as pursuing this route, as it has limited Chinese apparel imports and begun challenges before the World Trade Organisation against Chinese policies on auto parts and intellectual property protection.
As businesses from Mizuho Financial Group in Japan to Rams Home Loan Group in Australia encounter problems with subprime mortgages written in the US, a worried suspicion is emerging about a trans-Pacific financial link that may have been deeper than anyone realised: the US may have been paying for a lot of its imports in recent years with mortgage securities of dubious value.
New engine
“It’s possible that the US financial institutions are smart enough to have passed on the risk to Europe and elsewhere,” said Li Kui-wai, Director of the Asian business research center at City University of Hong Kong.
Frank-Jürgen Richter, a specialist in Asian economies who is the President of Horasis, a research group in Geneva, said, “Asians do not trust the American economy any longer, they are looking for a new engine and it might be China or Europe but not US.” But while Asian economies may not need the US as much as in the past, financial and commercial ties remain strong, and could prove a drag on the region.
China is still more than 20 times as dependent on exports to US a percentage of its total economic output as US is on exports to China. Bulk of Chinese exports to US involve products for which the components are largely imported from elsewhere in Asia, snapped together by Chinese workers and re-exported.
But a serious slowdown in such businesses, in which China supplies little more than low cost labour, could still result in large-scale layoffs. Yet the consequences as a share of Chinese economic output could be limited in a country where investment in roads, bridges, housing complexes and other fixed assets rose 26.6 per cent in the first seven months of this year.
Dollar’s strength
While dollar has temporarily strengthened against the euro and the pound as traders seek a haven from global financial troubles, it has tumbled this week against the yen and could fall if the housing debacle proves to have delivered a body blow to the entire US economy.
A weak dollar would be a problem not just for Asian exporters, which would find it harder to compete in the US market, but also for Asian central banks, which have been the biggest buyers of dollars in recent years. The People’s Bank of China keeps an estimated two-thirds of its $1.3 trillion foreign-exchange reserves in dollars. Asian central banks sitting on losses will face a tough decision of whether to continue their policies of buying dollars to prop up the US currency and thereby sustain their own exports.
If the dollar does drop, then Asia, which still conducts much of its trade in dollars, could be in trouble. “The Fed will be in a dilemma, to reduce the interest rate or let the economy slow - if you do reduce the interest rate, the dollar will fall,” said Mehta, of Essar Shipping.
Source: International Herald Tribune |
