Spending a few days in Asia is focusing my mind on the extent to which this region can detach itself from what is going on in Europe. It has successfully de-coupled from problems elsewhere (in 2007-08), but does the water that has passed under the bridge since then make Asia more resilient or more vulnerable to the shockwaves from Europe? It’s a key question, especially with China again making noises about offering more solid assistance to the eurozone.
As a reminder, it’s thanks to China and India that things have not been a whole lot worse over recent years. They alone accounted for more than half of global growth in 2008 and the majority in 2009. Since 2007, whilst developed market-growth is just about flat, China has grown by 30% and India 35%. The reasons for this Asian resilience are numerous and come from both sides, in both the causes of the crisis (very much centered in the West), together with Asia’s turnaround from the late ‘90s crisis, into a region of savers and of greater intra-Asian dependence (intra-Asia trade growing far faster than trade with the West).
The trade side of the picture is not a major threat to the growth picture in Asia, even if the eurozone enters a technical recession. China’s trade balance with the eurozone is around two-thirds of that of the US. For Japan, it’s one-third. Furthermore, the likely eurozone recession is going to be milder and less consumer-based than the US downturn of 2008-09. The real focus is the potential hit from the income account, i.e. overseas investors pulling out of Asia. History strongly suggests that it’s more often than not this is the factor that is far more destabilising for emerging markets i.e. overseas investors disposing of assets over a relatively short space of time.
Naturally, it is countries with current account deficits (making them reliant on overseas investors) that are more vulnerable, but the narrowing of the current account surpluses of both China and Japan cannot be ignored. In theory, this contraction could make them more vulnerable, given that a move into negative territory will change the dynamics of global trade patterns. But this is unlikely for both countries. Even though Japan is now running a trade deficit it continues to enjoy a far more stable position on the income account, the result of being the world’s largest holder of net external assets over the past 20 years.
Overseas assets (especially Japan’s favoured fixed income) posted excellent returns last year, but this may not last, especially in the fixed income space. From this perspective Japan looks more vulnerable to a switch into a current account deficit than China, but it’s only a mild risk. China’s surplus looks set to rise over the next year as its long-held wish to rebalance away from investment towards consumption bears minimal fruit. Overall, despite these short-term trends, Asia has little to worry about in terms of capital flows in the face of the eurozone crisis.
But the other trend that offers comfort is the diverging fortunes of sovereign debt between much of the West and Asia (Japan aside). The IMF sees the G7 debt/GDP ratio rising for each of the next five years. The same measure is seen falling by half (from 40% to near 20%) for developing Asian markets. Certainly the numbers may exaggerate this e.g. given the expansion of local debt in China but, even allowing for this, the divergent trends remain. Asia’s resilience, which was so key to supporting the global economy a few years ago, should remain even stronger this time around.