Thursday 5 March 2009
Downturn effect: China and Japan go different ways
At opposite ends of the spectrum in this regard are China and Japan. While China’s proactive and aggressive strategy of spending on infrastructure and other public works projects seems to be paying off, a devastated and supine Japan makes only feeble gestures towards economic stimulus and pines for a return to the status quo ante
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Downturn effect: China and Japan go different ways
By ANTHONY ROWLEY
5 March 2009
Household wealth in the United States has long been rather illusory, based as it has been on a credit-fed bubble in the equity and housing markets, but while it lasted it served to fuel a consumption boom. Both are now collapsing at a rate that has stunned economists, and this is bad news for the all too many Asian governments that seem content to let the vicious spiral continue while hoping vainly for a sign of a turnaround in the US.
At opposite ends of the spectrum in this regard are China and Japan. While China’s proactive and aggressive strategy of spending on infrastructure and other public works projects seems to be paying off, a devastated and supine Japan makes only feeble gestures towards economic stimulus and pines for a return to the status quo ante. The rest of East Asia, meanwhile, appears nonplussed by what is happening. US household net worth has fallen from around US$62 trillion at the height of the credit bubble in 2007 to US$47 trillion now, according to the Institute of International Finance (IIF) in Washington. ‘Wealth destruction in recent months has been extreme, employment is falling sharply (and) consumer confidence has fallen to a historic low,’ says the IIF. The ‘near-term outlook for consumption continues to deteriorate’.
No use Asian countries looking for any pick-up in demand there to bail them out in coming months, and quite probably well into next year. The US savings rate is likely to continue rising into the foreseeable future as US households seek to rebuild their collapsed stock market and housing wealth with real money - for those lucky enough to have jobs, that is. There is not much point in Asia looking to Europe for salvation either. The IIF suggests that the euro area can expect a ‘longer and deeper recession’ than originally envisaged. External demand has slumped, housing downturns have become severe, unemployment is rising and banking strains are growing. In addition, ‘the region is lacking the degree of (monetary and fiscal) policy stimulus evident in some other countries’.
President Barack Obama’s attempts to apply stimulus to the US economy have received massive publicity, even though it is obvious that even a couple of trillion dollars spent in this way cannot begin to compensate for a massive drop in US household wealth and consumption power. Meanwhile, as the IIF says, the ‘solvency’ of some governments is beginning to be called in question. This obviously has to include the US government.
By contrast, relatively little attention has been paid by world media to China’s stimulus efforts, and yet these dwarf those of the US and are arguably of greater global significance just now. The slowdown in China is ‘bottoming out’ and the economy is ‘showing signs of stabilising’, says the IIF, which also notes that China has been the ‘main driver’ of stabilisation of a recent partial recovery in commodity prices. It was fashionable until recently to decry so-called ‘command economies’, but at least they have the merit of being credible in a downturn. China’s commands to local authorities to move ahead on infrastructure building and to banks, both domestic and foreign, to step up lending are being obeyed. Industrial production in China actually edged up last December compared with a year previously.
Even the IIF may be underestimating China’s recovery potential. It mentions the four trillion yuan (S$908.8 billion) stimulus package announced by the central government and which is currently being implemented. But reliable sources have suggested in recent weeks that the additional amount to be spent on stimulus by provincial governments in China could be anywhere between 18 and 30 trillion yuan. By comparison with China, Japan is a disaster area, and is likely to remain so while the Liberal Democratic Party (LDP) remains in power. A little-noticed remark by Prime Minister Taro Aso in Washington recently was that Japan and others should continue to support the US dollar, in the interest of ‘stability’. What this implies is that Tokyo will continue to leave most of its US$1 trillion of foreign exchange reserves in US Treasury securities.
Contrast this with China’s aggressive use of its reserves to boost the economy. Japan has become hopelessly dependent upon the US in trade as in other areas and is paying a terrible price for this now. Instead of using the money earned from past exports to the US as a source of strengthening and reorienting the economy now (towards more integration with Asia), the LDP is handing out petty change at home while keeping its savings in Washington.
As for the rest of East and Southeast Asia, it was notable - and lamentable - that the Asean summit last weekend sent out no urgent call for a regional summit (at least of the Asean+3 group) to discuss concerted responses to the current crises. These could include an integrated regional infrastructure programme, using reserves from all members - certainly including Japan - to finance it. A bold regional vision is lacking - most of all in Japan.
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