Op-Ed Contributors
More spending needed for true recovery
By Jaspal Bindra (China Daily)
Updated: 2010-01-22 07:46
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A news piece from last year about mice nibbling away an elderly Chinese man's life savings tells us two things. First, the stove, as in 80-year-old Yang Lihong's case, isn't exactly a safe piggy bank. Second, and more importantly, it highlights the norm among Chinese households to stash away cash for a rainy day.
Thrift is a value promulgated throughout much of Asia, especially China, and that in large part explains the country's high savings rate, estimated to be about 40 percent of GDP. Consumerist culture has no doubt caught up in recent years, but for the Chinese economy as a whole, the propensity to save outweighs the willingness to spend. The "100-yuan-a-week" campaign made famous by 24-year-old Chinese photographer Wang Hao on his blog shows that even those from the so-called Generation Y can take pride in being frugal.
Unfortunately, this is not what the world requires. What is most needed today is a more even balance of the consumer psyche between Asia and the West. There is a pressing need for the West to save more and Asia to spend more. The world economy is on the mend and improving economic data across Asia - the rebound in South Korea with three successive quarters of growth merits attention - suggests the region is set to enjoy steady growth this year.
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The US economic picture has improved - Standard Chartered Bank's global research forecasts US real GDP growth at 2.3 percent in 2010 from a contraction of 2.4 percent last year - but it is still too early to celebrate the recovery. For certain, any recovery will be very slow and gradual, particularly in the developed economies.
We may even see a dip on the road to economic recovery. US household and business confidence has been shaken so hard that a private sector recovery is likely to be sluggish and consumer spending weak this year. That is where the trouble for export-dependent Asia lies, because the region's exporters have to live with smaller orders if their biggest customers are grappling with rising debt, layoffs and wage cuts.
The global financial crisis has also shown that a "decoupled Asia" was a myth, even though prompt economic stimulus and sound fiscal positions provided the buffer that enabled Asian economies to ride out the storm in fairly good shape. Although year-on-year export figures should start to improve for many Asian economies, exports will remain below pre-crisis levels for as long as the US economy is struggling to get back to top form.
Economic forecasts for Asia continue to be revised higher. In October, the IMF raised its 2010 GDP growth forecast for the region to 5.75 percent from its May estimate of 4.3 percent. According to the IMF, the Chinese economy is estimated to have grown 8.5 percent last year. And it is projected to grow 9 percent this year. The fact that the Chinese economy would continue to grow is beyond doubt.
But one should bear in mind that the world is a $61-trillion economy and China accounts for only $4.4 trillion of that. The US, European Union (EU) and Japan together account for more than half of the global economy, while the BRIC countries (Brazil, Russia, India and China) make up less than 15 percent. Therefore, the job of getting the global economy back in shape is not something that can be done by Asia alone.
In economies like Hong Kong, Taiwan, South Korea and Singapore, painful memories of the crisis seem all but forgotten by consumers who have loosened their purse strings after the rebound of equity and property markets. With expansionary fiscal policy and initiatives - such as Singapore's Jobs Credit Scheme - helping to limit unemployment in many Asian economies, banks were able to step up lending to households even when lending to businesses fell. Asset price inflation did have the benefit of a positive wealth effect that was instrumental in keeping household spending afloat while the economy was fragile. But with excess liquidity flowing into equities and property and asset bubbles starting to form, the pressure is on for policymakers to tighten their monetary policies.
While a number of countries, including Israel, Norway and Australia, have hiked interest rates, the dilemma for many economies is that tightening them early may be tantamount to opening the gates to hot money, while holding them back may fuel asset price inflation. In China, when prices move up this year - we (Standard Chartered Bank) expect inflation to reach 3 percent year-on-year in the second quarter - the response is likely to be credit guidance and rate increase both. Overall, however, we expect the policy to remain supportive and do not think policy adjustments in the coming quarters will disrupt the recovery or result in significant credit squeeze.
A related issue is that of the stability of the yuan against the US dollar, a situation that is compelling many Asian economies to keep their currencies stable in order to maintain export competitiveness. This has left floating currencies, particularly the euro, to take the strain vis--vis a weaker dollar. Though there is pressing need for Asian economies to allow their currencies to appreciate, most of them will be unlikely to do so until they are confident that a recovery is truly underway.
It is, in short, a difficult balance that policymakers have to strike - continue to provide support to their economies until they are assured of a recovery, but not maintaining it long enough for it to trigger inflationary pressure or undermine the region's new-found reputation as prudent fiscal managers. The reality check for Asia will come when government stimulus packages ease, and the crucial challenge will be to ensure balanced and steady growth in the face of weaker export demand from the US and the EU. There will also be a need to deal with rising protectionist pressures globally, as last year's APEC summit in Singapore highlighted.
It is crucial that Asia develops a stronger culture of domestic consumption as a growth driver. The process is underway. Standard Chartered Bank's Asian retail sales index, which includes data from eight Asian economies, grew by 9 percent year-on-year in August, or 2.2 percent year-on-year, excluding China. This is a positive start since the general perception is that Asian consumption cannot improve before exports rebound. The reluctance of Chinese households to spend has been attributed to factors such as their financial and social insecurity. Efforts to unlock savings will hinge on reform in the areas of healthcare, education, housing and consumer finance, but these will take time, as will the structural reform that are needed to ensure a smooth reallocation of resources as the export-oriented economy is transformed into one that emphasizes private domestic demand.
The world economy certainly has a long way to go, but we remain hopeful of the Asian miracle.
The author is Standard Chartered Bank's Asia chief executive.
(China Daily 01/22/2010 page9)
