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Saturday 11 October 2008
Asia Suddenly Feels the Pain
Can a region like Asia - with more than $3 trillion in foreign exchange reserves, high savings rates, mostly well-capitalized banks and minimal exposure to American mortgage-backed securities - run into trouble during a global financial crisis?
HONG KONG: Can a region like Asia - with more than $3 trillion in foreign exchange reserves, high savings rates, mostly well-capitalized banks and minimal exposure to American mortgage-backed securities - run into trouble during a global financial crisis?
The answer Friday was a resounding yes.
Stock markets plunged from Tokyo to Mumbai. Real estate prices are tumbling from Seoul to New Delhi. The economy in Singapore has tipped into recession, and there is growing evidence of a recession in Japan, where an unlisted insurer and a real estate investment trust filed for bankruptcy Friday.
From UBS to Morgan Stanley, investment banks have been warning in the past week of a global economic downturn. For Asia, that sounds uncomfortably like a forecast that economic slowdowns in the United States and Europe will cripple demand for Asia’s exports and pull the region down into recession as well.
What went wrong? As the biggest beneficiary of the rise in global trade, Asia depends heavily on exports to the West. Everything from corporate earnings to real estate prices depends on a steady inflow of Dollars and Euros.
Growth in exports has slowed to a crawl or started declining across most of the region when calculated in local currency terms and adjusted for inflation. And that is even before Western stores have had a chance to cut back their orders in response to the sort of steep declines in sales that American retailers announced on Wednesday.
India announced Friday that industrial production in August was 1.3 percent higher than a year earlier. That was a drastic deceleration from July, when the growth rate was 7.4 percent.
In Korea, exporters are suddenly struggling.
“The problem is the global recession - people don’t buy consumer electronics, this means less exports and fewer dollars for us,” said Choi Hae Pyong, an electronics parts manufacturer south of Seoul. “It’s like walking in a thick fog.”
As long as the region kept exporting and kept saving the proceeds, investors bid up real estate and share prices that now seem to have a long way to fall.
Matthew Au, a luxury real estate broker in Hong Kong, said that this past week had been even worse than the days after the Tiananmen Square killings on June 4, 1989, which briefly shattered business confidence here.
“I’ve been through June 4th, the 1997 financial crises and SARS, but this time around, the decline in housing prices has been the most abrupt,” he said. “Sellers of properties are now more willing to consider offers which come in 20 to 30 percent below their asking prices.”
As global financial markets increasingly look to each other for direction, lack of confidence in financial institutions and housing markets in the West has also proved contagious in Asia. The Asian news media, often focused on economics instead of potentially touchy political issues, have been full of reports in the past three weeks about failing banks and falling real estate prices, and that has fed through into local markets.
An outflow of Western investment has also played a role in Asia’s decline now, although foreign investment has become less important in much of the region as Asia has become a formidable saver in its own right.
In Malaysia, foreign investors held nearly a third of Malaysia’s national debt until they started selling this summer to raise money so as to cover losses in other markets.
In Korea, foreign investors sold $29 billion in the first nine months of this year. This was an important reason why the country’s foreign exchange reserves have slipped to a still formidable $239.7 billion last month from $264.2 billion in March.
Many in Asia now despair of help from the West, and are looking to Beijing.
“The United States is beyond saving - our only hope rests with China,” said Dick Chen, a middle-aged manager in a pin striped blue shirt and carrying an ultraslim modern mobile phone who watched the markets with dismay after lunch in a trading room of Tai Fook Securities in Hong Kong.
Can China save Asia? For the past six years, the Chinese economy has been like an enormously powerful hound that has charged ahead despite every obstacle. Worried that the economy may overheat and accelerate inflation, Beijing officials have run a budget surplus, repeatedly raised interest rates and even required banks to deposit a remarkable one-sixth of their entire assets as reserves at the central bank to slow lending.
Now Beijing is trying to loosen the leash it has had on the economy by cutting interest rates and taxes and lowering reserve requirements. But the government is finding the economy already looks a little out of breath as exports slow.
Economists see annual growth slowing from 12 percent a year ago to 8 or 9 percent this winter. That is still respectable by most countries’ standards, but a shock for many Chinese, particularly workers losing their jobs in factories producing mainly for export markets.
For Asia, this is the crisis that was never supposed to happen again.
The region was deeply scarred by the Asian financial crisis of 1997 and 1998.
Dozens of banks failed after lending too much with too little capital, while profligate governments found that they had borrowed too much overseas and could not repay their debts.
That led to a rapid contraction of credit that bankrupted many industrial companies and caused a steep decline in economic output and a surge in unemployment - the same fate that may now await the United States and Europe, many economists and investors fear.
Southeast Asian economies have never entirely recovered. After a drop of nearly 10 percent on Friday, the main index of the Thai stock market closed at 452, a quarter of its high in 1994.
Most of Asia emerged from that crisis with more cautious banks, stricter financial regulation, a tighter rein on government spending and a strong determination to accumulate. But while Asia broke its dependence on capital flows from the West, the dependence on exports remained.
Yet Asia’s frugality over the past decade has given the region a lot more room to manoeuvre than most Western countries.
South Korea and India are often cited by economists as the two most vulnerable economies in Asia.
South Korea is drawing attention because its trade deficit, by the broadest measure possible, was $4.7 billion in August, after mostly surpluses before that. Korean exports of manufactured goods have slumped even as the cost of its oil-dominated imports have surged - although falling oil prices now will help.
The South Korean won showed the steepest decline of any Asian currency against the dollar on Friday morning, falling more than 3 percent.
But the won soared on Friday afternoon, with a gain for the day of 6.3 percent. The reason? Widespread rumours that the government would start spending part of the country’s huge foreign exchange reserves to prop up the won.
The South Korean government only owes $334 million in foreign debt repayments by the end of next year, or 0.14 percent of foreign exchange reserves, according to a recent study of emerging market debt by ING. Big Korean exporters like Samsung, hobbled for lack of foreign currency reserves in 1997, have hoarded formidable reserves of dollars.
Corporate debt repayments are a little larger, and also harder to calculate. But since all of Asia only owes $31 billion in debt repayments through the end of last year, South Korea’s share is tiny relative to its foreign reserves.
India was one of the few countries in Asia to escape the financial crisis a decade ago, because it was just starting to embrace international markets then. It did not adopt the same tight bank regulatory standards and tough fiscal policies as the rest of Asia after that crisis.
That has prompted some economists, like Ajay Kapur at Mirae Asset and Takahira Ogawa at Standard and Poor’s, to express particular concern about India’s preparedness for the current crisis. While India has $295.3 billion in foreign exchange reserves, it is running a large government budget deficit and a large trade deficit while its banks have lent very aggressively to a real estate sector that is now tumbling quickly.
With an election expected early next year, Indian leaders have been much more upbeat about their country’s prospects than most Asian leaders.
Policy makers in India have also subscribed to the idea that their economy has “decoupled” from Western economies, an idea that most economists and policy makers in Asia rejected many months ago.
“India is not from any other planet,” said a posting on an Indian web site this week. “This common logic is ignored by our policy makers.”
Asia Suddenly Feels the Pain
ReplyDeleteBy Keith Bradsher
10 October 2008
HONG KONG: Can a region like Asia - with more than $3 trillion in foreign exchange reserves, high savings rates, mostly well-capitalized banks and minimal exposure to American mortgage-backed securities - run into trouble during a global financial crisis?
The answer Friday was a resounding yes.
Stock markets plunged from Tokyo to Mumbai. Real estate prices are tumbling from Seoul to New Delhi. The economy in Singapore has tipped into recession, and there is growing evidence of a recession in Japan, where an unlisted insurer and a real estate investment trust filed for bankruptcy Friday.
From UBS to Morgan Stanley, investment banks have been warning in the past week of a global economic downturn. For Asia, that sounds uncomfortably like a forecast that economic slowdowns in the United States and Europe will cripple demand for Asia’s exports and pull the region down into recession as well.
What went wrong? As the biggest beneficiary of the rise in global trade, Asia depends heavily on exports to the West. Everything from corporate earnings to real estate prices depends on a steady inflow of Dollars and Euros.
Growth in exports has slowed to a crawl or started declining across most of the region when calculated in local currency terms and adjusted for inflation. And that is even before Western stores have had a chance to cut back their orders in response to the sort of steep declines in sales that American retailers announced on Wednesday.
India announced Friday that industrial production in August was 1.3 percent higher than a year earlier. That was a drastic deceleration from July, when the growth rate was 7.4 percent.
In Korea, exporters are suddenly struggling.
“The problem is the global recession - people don’t buy consumer electronics, this means less exports and fewer dollars for us,” said Choi Hae Pyong, an electronics parts manufacturer south of Seoul. “It’s like walking in a thick fog.”
As long as the region kept exporting and kept saving the proceeds, investors bid up real estate and share prices that now seem to have a long way to fall.
Matthew Au, a luxury real estate broker in Hong Kong, said that this past week had been even worse than the days after the Tiananmen Square killings on June 4, 1989, which briefly shattered business confidence here.
“I’ve been through June 4th, the 1997 financial crises and SARS, but this time around, the decline in housing prices has been the most abrupt,” he said. “Sellers of properties are now more willing to consider offers which come in 20 to 30 percent below their asking prices.”
As global financial markets increasingly look to each other for direction, lack of confidence in financial institutions and housing markets in the West has also proved contagious in Asia. The Asian news media, often focused on economics instead of potentially touchy political issues, have been full of reports in the past three weeks about failing banks and falling real estate prices, and that has fed through into local markets.
An outflow of Western investment has also played a role in Asia’s decline now, although foreign investment has become less important in much of the region as Asia has become a formidable saver in its own right.
In Malaysia, foreign investors held nearly a third of Malaysia’s national debt until they started selling this summer to raise money so as to cover losses in other markets.
In Korea, foreign investors sold $29 billion in the first nine months of this year. This was an important reason why the country’s foreign exchange reserves have slipped to a still formidable $239.7 billion last month from $264.2 billion in March.
Many in Asia now despair of help from the West, and are looking to Beijing.
“The United States is beyond saving - our only hope rests with China,” said Dick Chen, a middle-aged manager in a pin striped blue shirt and carrying an ultraslim modern mobile phone who watched the markets with dismay after lunch in a trading room of Tai Fook Securities in Hong Kong.
Can China save Asia? For the past six years, the Chinese economy has been like an enormously powerful hound that has charged ahead despite every obstacle. Worried that the economy may overheat and accelerate inflation, Beijing officials have run a budget surplus, repeatedly raised interest rates and even required banks to deposit a remarkable one-sixth of their entire assets as reserves at the central bank to slow lending.
Now Beijing is trying to loosen the leash it has had on the economy by cutting interest rates and taxes and lowering reserve requirements. But the government is finding the economy already looks a little out of breath as exports slow.
Economists see annual growth slowing from 12 percent a year ago to 8 or 9 percent this winter. That is still respectable by most countries’ standards, but a shock for many Chinese, particularly workers losing their jobs in factories producing mainly for export markets.
For Asia, this is the crisis that was never supposed to happen again.
The region was deeply scarred by the Asian financial crisis of 1997 and 1998.
Dozens of banks failed after lending too much with too little capital, while profligate governments found that they had borrowed too much overseas and could not repay their debts.
That led to a rapid contraction of credit that bankrupted many industrial companies and caused a steep decline in economic output and a surge in unemployment - the same fate that may now await the United States and Europe, many economists and investors fear.
Southeast Asian economies have never entirely recovered. After a drop of nearly 10 percent on Friday, the main index of the Thai stock market closed at 452, a quarter of its high in 1994.
Most of Asia emerged from that crisis with more cautious banks, stricter financial regulation, a tighter rein on government spending and a strong determination to accumulate. But while Asia broke its dependence on capital flows from the West, the dependence on exports remained.
Yet Asia’s frugality over the past decade has given the region a lot more room to manoeuvre than most Western countries.
South Korea and India are often cited by economists as the two most vulnerable economies in Asia.
South Korea is drawing attention because its trade deficit, by the broadest measure possible, was $4.7 billion in August, after mostly surpluses before that. Korean exports of manufactured goods have slumped even as the cost of its oil-dominated imports have surged - although falling oil prices now will help.
The South Korean won showed the steepest decline of any Asian currency against the dollar on Friday morning, falling more than 3 percent.
But the won soared on Friday afternoon, with a gain for the day of 6.3 percent. The reason? Widespread rumours that the government would start spending part of the country’s huge foreign exchange reserves to prop up the won.
The South Korean government only owes $334 million in foreign debt repayments by the end of next year, or 0.14 percent of foreign exchange reserves, according to a recent study of emerging market debt by ING. Big Korean exporters like Samsung, hobbled for lack of foreign currency reserves in 1997, have hoarded formidable reserves of dollars.
Corporate debt repayments are a little larger, and also harder to calculate. But since all of Asia only owes $31 billion in debt repayments through the end of last year, South Korea’s share is tiny relative to its foreign reserves.
India was one of the few countries in Asia to escape the financial crisis a decade ago, because it was just starting to embrace international markets then. It did not adopt the same tight bank regulatory standards and tough fiscal policies as the rest of Asia after that crisis.
That has prompted some economists, like Ajay Kapur at Mirae Asset and Takahira Ogawa at Standard and Poor’s, to express particular concern about India’s preparedness for the current crisis. While India has $295.3 billion in foreign exchange reserves, it is running a large government budget deficit and a large trade deficit while its banks have lent very aggressively to a real estate sector that is now tumbling quickly.
With an election expected early next year, Indian leaders have been much more upbeat about their country’s prospects than most Asian leaders.
Policy makers in India have also subscribed to the idea that their economy has “decoupled” from Western economies, an idea that most economists and policy makers in Asia rejected many months ago.
“India is not from any other planet,” said a posting on an Indian web site this week. “This common logic is ignored by our policy makers.”