[A-List] Roach on Asia

["Mark Jones" <markjones011@xxxxxxxxxxxxx>]

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[mailto:owner-pen-l@xxxxxxxxxxxxxxxxxxx]On Behalf Of Ian Murray
Sent: 01 November 2002 17:56
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Subject: [PEN-L:31753] Roach on Asia


Global: Asia Is Now a Zero-Sum Game
Stephen Roach (from Shanghai)



Apart from China, there is no dynamism in Asia these days. At the end of a
two-week Asian tour, I am struck by a grim sense of foreboding that is
evident throughout this once vibrant region. While the growth story in China
is alive and well, economies elsewhere in the region are sputtering, at
best. As America slows, a US-centric global economy is in desperate need of
a new growth engine. That engine is not to be found in Asia.

The year 2002 has turned out to be an important stress test for a US-centric
global economy. A sputtering American growth dynamic has taken a
surprisingly heavy toll on the rest of the world. The reverberations have
been especially acute in two key regions of the world -- Europe and Asia.
Not only has the engineless global growth dynamic unmasked serious
structural flaws in Euroland, but it has also revealed serious deficiencies
in Asia's externally led growth model. As I have traveled extensively
throughout the region over these past two weeks, the only question that
seems to matter is the prognosis for the US economy. Needless to say, my
answer does not exactly provide for a very uplifting discussion.

It's always risky to generalize about a region so diverse as Asia. There are
really three distinct stories to tell in Asia these days -- Japan, China,
and the rest of the region. After all these years, I continue to be amazed
at how Japan still has the potential to disappoint. And yet that's exactly
what has happened to the latest reform effort. During my visit to Tokyo 10
days ago, you could literally feel a sense of movement in the air. The
Takenaka effort at bank reform, in the aftermath of the Bank of Japan's
radical purchase of equities, spoke of a new potential to break a dozen
years of inertia. And I fell for it. But the leadership of the ruling LDP
party demonstrated once again what makes Japan's case for reform so
hopeless. Yet another effort at cleaning up the banking system was quashed
by the power structure. The moral hazard of Japan's "convoy system" emerges
once again very much intact -- banks remain too big to fail, as do their
zombie-like corporate borrowers. Meanwhile, the Japanese economy has taken
yet another turn for the worse, as evidenced by recent disappointing trends
in industrial production, inventories, employment, and personal consumption.
It's déjà vu all over again. Sadly, Japan just doesn't seem as if it will
ever get up off the mat again.

Nor is the rest of Asia (excluding China) standing on its own and resisting
the pressures of a tough global climate. Korea -- where hope for vigor was
highest in the first half of this year -- has suddenly slowed. Industrial
output growth screeched to a near halt in September, and private consumption
growth has slowed markedly; even Korean export growth has slipped from the
heady gains recorded earlier this year. In Taiwan, the recent US port strike
appears to have prompted some August-September gyrations; however, looking
through the noise, rising unemployment and likely fourth quarter moderation
in output and export growth all point to a decided deceleration of the
Taiwanese economy well into 2003. Meanwhile, manufacturing output growth has
slowed appreciably in Singapore and Thailand, whereas Hong Kong remains
trapped by the twin forces of deflation and rising unemployment. Lacking in
domestic demand, the smaller economies of Asia have little to show for
themselves in the face of a US-led slowdown in external demand.

And then there's China -- an entirely different story. In contrast to the
near synchronous slowing elsewhere in Asia, the Chinese economy is on an
accelerating growth path. All of the September numbers were sending
unambiguous signals of a quickening of economic activity. That's true of
industrial output, exports, infrastructure spending, and foreign direct
investment. It's also true of an equally impressive acceleration in GDP
growth to an 8.1% YoY rate in 3Q02 (see my October 17 dispatch, "The China
Factor"). China continues to be the fastest-growing economy in Asia, or for
that matter, the world. And that's true irrespective of the slowdown in the
broader global economy.

The math of China's growth contribution underscores the key role this
country is playing in driving Asian and global growth. At current exchange
rates, China accounts for only about 4% of world GDP. On a purchasing power
parity basis, however, that share leaps to 12%. In my view, the PPP-based
construct -- which gets away from currency-induced distortions to a nation's
growth contribution -- provides a more accurate assessment of China's role
in the global economy. That's especially the case, if you believe, as I do,
that China's currency is significantly undervalued. On a PPP basis, China is
already the growth engine of Asia. While it has a share of fully 37% in
pan-Asian output (including Japan, the newly industrialized Asian economies,
and developing Asia), according to our estimates, it accounted for more than
65% of pan-Asian growth in 2001-02.

With GDP growth holding in the 7-8% range, China's resilience stands in
sharp contrast with decelerating trends elsewhere in Asia. And I guess that'
s precisely the point. Lacking in autonomous sources of domestic demand, the
Asian growth dynamic is now all about supply. And China increasingly has the
scale and the scope in its production platform -- to say nothing of the cost
advantage -- to win the market-share battle in the region hands down. China'
s pan-Asian dominance becomes all the more apparent in the context of a
global slowdown. For externally led economies, a slackening of foreign
demand refocuses the growth dynamic. In the first half of 2002, all of Asia
rode the tailwinds of a US-led inventory cycle. As that temporary impetus
ran its course, only China has been able to hold its own. Increasingly, it's
a zero-sum game in Asia. China is now separating itself from the pack.