Nowhere to run, nowhere to hide

Pessimism on the World Financial Situation

Written by Philip Bowring

Tuesday, 13 September 2011

Nowhere to run, nowhere to hide?

The present global financial situation is a reminder of the story of the German who in 1939 wanted to get as far away as possible from likely war in the west -- and went to Guadalcanal in the Solomon Islands, which would later become the scene of some of World War II’s bitterest fighting.

Supposedly much of Asia is now relatively safe with few real estate bubbles (China and Hong Kong excepted), fairly low public debt and more foreign exchange reserves than they know what to do with. The likes of Taiwan, Indonesia, Thailand and Malaysia are not full of excitement but they look healthy enough. And China continues to forge ahead despite inflation at 6 percent or so and rising doubts about the health of its financial institutions.

All in all it looks healthy compared with Europe with its wobbly euro and nearly-collapsing peripheral states with their outsize debts, or the US where the external deficit remains chronic, politics a dangerous standoff and unemployment at unacceptable levels.

However, take a closer look and Asia may not be so great after all. China’s latest export data shows year-on-year growth of 25 percent. But how much of this is due to currency factors? China expresses its trade accounts in dollars, not a slowly appreciating yuan. Yet most of its exports to Europe are in euros and some to other destinations in recently strong currencies such as the yen and Australian dollar. Allow for that and the numbers are less healthy – and that is before both the latest economic slowdowns in Europe and the US, and before the impact of rapidly rising wage costs on some industries where lower cost suppliers are now available.

Not that China is in much danger of seeing its trade surplus vanish, even if exports to the west stagnate or even fall. If current global gloom prevails, the next result must surely be a further decline in commodity prices, which have been so long boosted by a mix of Chinese demand, slow growth in supply and speculation financed by cheap money. All those have started to come to an end – though the process could be drawn out.

That should benefit Chinese consumption and bring down inflation but is just the news that the commodity exporters of Southeast Asia, Australia and the Gulf do not want. They are not going to be rushing to boost local demand if export prices turn sour. They have found it hard enough to grow fast even when external conditions have been very positive because domestic issues – politics in Malaysia and Thailand, skills shortages almost everywhere, stand in the way.

Meanwhile China’s problems are internal, not external, wedded as the government is reducing inflation while trying to achieve a growth rate which is unsustainable given zero manpower growth and past overinvestment in unproductive assets. The existence of a growing number of first-class Chinese companies, mostly from the private or semi-private sectors, cannot hide a macro picture in some ways reminiscent of Thailand in 1996. The big difference of course is that China is a creditor, not debtor. That precludes crisis but not a combination of inflation and sharp slowdown. It will shy away from strong efforts against inflation because the higher interest rates need would expose the over-borrowed situation of so many state enterprises, and put upward pressure on the Yuan to the distress of influential exporters. Read more