By Linda Yueh, fellow in economics at St Edmund Hall, Oxford University (THE GUARDIAN, 28/10/08):
Record falls in Asian stock markets show that confidence, or the lack of it, knows no borders in a globalised world. This does not, however, mean that Asia is without its own growth drivers in the shape of China and, to some extent, India.
The start of the week saw Asian markets from the Philippines to China fall dramatically, while Hong Kong and Tokyo saw record lows, on the back of a few pieces of bad news. Japan announced a substantial increase in the recapitalisation funds to help its banks to the tune of $110bn. The largest of China’s four major state-owned commercial banks, ICBC, reported lower than expected profits, reflecting its $1.3bn exposure to the financial crisis. Further afield, IMF bail-outs of Iceland, Ukraine and anticipated lending to Hungary and Pakistan underscored the fragility of economies to balance of payments crises.
The dramatic falls in Asia, which triggered subsequent declines in Europe, underline doubts over the exposure of Asian banks and financial institutions to a crisis that began in the US. The American and British rescue plans may have somewhat stabilised markets, but continuing volatility in Asia can only undermine stability on the bourses of Wall Street and London.
For much of developing Asia, the US remains the main export market – leaving those economies to a large extent susceptible to the vicissitudes of American markets. And yet, while no country is immune from financial contagion, Asia does have independent engines of growth. India, for instance, only accounts for about 1% of world merchandise trade and its own consumers provide much of its growth. More telling, however, is China, given its importance in the global economy. The IMF estimates it overtook the US as the largest engine of growth in 2007, and contributed about a third of global economic growth in the first half of 2008.
Recent years have seen a growing emphasis on Chinese trade surplus. Despite official estimates recording a halving of exports in the third quarter, however, real economic growth was recorded at 9% per annum – that is, the halving of exports cut the growth rate by 1.2%. It follows, therefore, that were Chinese exports to fall to zero, China would still grow at 7.8%. Such a figure is inevitably imprecise, but it squares with China’s strong growth rate before the big economic opening of the 1990s. Consumption in China accounts for half of GDP, which has room to increase, particularly if the government pays more attention to consumers in rural areas – the majority of the population – where better social welfare provision would reduce the motive for precautionary saving. Saving is likely to remain high in China, but a modest reduction will help to decrease the investment rate, which is fuelling asset bubbles in the country.
The state ownership of China’s banks means recapitalisation can be rapid. Indeed, nearly all of the large banks have received sizeable injections in the past from China’s foreign exchange reserves, shrinking the bad loans on their books. (ICBC’s profit might have been down, but it was still 25%.)
Burgeoning Chinese domestic demand will serve as an engine of growth, boosting the countries and companies in Asia and elsewhere that are selling to its market. Although the crisis will cause concern in China, its government also has the funds to support its economy after several years of impressive growth.
No country is immune from the financial crisis, but some will be better sheltered. China may well emerge with a strong set of domestic growth drivers as a result.