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Mixed signals from Asia's animal spirits

May 14, 2009 12:20 IST

Is Asia a bouncy, bouncy Tigger? Or, like the proverbial dead cat, are Asian tigers on a merely temporary upward trajectory? Certainly, Asia's tigers and, if you will bear with the zoological references, its canaries, too, have done better recently.

Stock markets have leapt, in some cases by as much as 50 per cent above the depths plumbed after Lehman Brothers vaporised. Net portfolio investment into the region is running at a pace not seen in five years. Yields on Asian bonds have narrowed.

More important than market froth -- who, these days, trusts what the markets have got to say, anyway? -- real economic data have been a bit brighter. That suggests, to those of sunny disposition at least, that the worst may already be over for several Asian economies.

The trends are still turbid. But look at the canaries, those export-reliant economies whose near-death rattles late last year pointed to a collapse in global demand. In the last quarter of 2008, Taiwan suffered export declines of 40 per cent. Shipments are still falling, but more moderately. Although April was bad, the previous period saw month-on-month improvements.

Some of the tigers, too, present a somewhat happier picture, although happiness, in this context, means an economy that is merely contracting rather than one in freefall.

South Korea, whose banks' ability to roll over dollar-denominated debt was being questioned only a few months ago, appears to have groped its way out of the woods. The won is stronger, partly thanks to currency-swap arrangements put in place by the US and Japan.

Seasonally adjusted exports rose sharply in April from March although, in dollar terms, they are still down a fifth against this time last year. South Korea even managed to grow a smidgen (0.1 per cent) in the first quarter of 2009 against the last quarter of 2008. Again, year on year, output is down -- by 4.3 per cent.

Some of the economic cushion is being provided by China. Official figures tell us the world's one remaining growth engine expanded at a rate of 6.1 per cent in the first quarter. That is a far cry from the 13 per cent sprint of 2007. But it will not look too grim if, as many believe, this turns out to be the low point.

Chinese growth is coming courtesy of a massive spending package, much of it on roads, bridges and airports, and thanks to "requests" to state- dominated banks to open the credit sluices. So successful has the command economy been in pumping out money that banks felt obliged to turn off the tap in April for fear of creating an asset bubble.

Once again, the omens are mixed. This week, we learnt that exports from China in April fell 23 per cent, undermining hopes that March's moderate 17 per cent drop marked a bottoming out. On the brighter side, fixed-asset urban investment has leapt 30 per cent from a year earlier. House prices may have stopped falling.

To answer the question posed at the start, some economies, including all-important China's, probably are scraping along the bottom. For many, things are likely to get better from here.

But before we get carried away, we should grasp how much has already been lost. Take Japan. Please. According to estimates from Nikko Citigroup, Japan's economy contracted 9.2 per cent in the year to this April, before beginning the mildest of recoveries. That is nearly a tenth of economic output.

To put it in context, during the misleadingly named "Lost Decade" output in fact grew by a cumulative 15 per cent.

Moreover, expectations of improvement remain largely predicated on that old standby: external demand. This week, a string of Japanese electronics companies, including Casio, Hitachi and Olympus, predicted that sales would recover from October.

They may be right. But Japanese hopes of better days ahead rest firmly on a global recovery. Richard Katz, writing in The Oriental Economist, says: "Until Japan figures out how to shift to domestic demand, a vibrant recovery will have to wait."

That goes for the rest of Asia too. Stephen Roach of Morgan Stanley scoffs at suggestions -- implied by recent market exuberance -- that Asia is braced for a vigorous recovery. The US consumer is sick, he says. Nations that cannot get a self-sustaining recovery going, including China, face the risk of relapse.

Peter Elston, Asia strategist at Aberdeen Asset Management, argues that the region will make the required transition to domestic-led growth, long and painful though the process may be. He expects economies to make progress, partly because they have so far to go.

According to Credit Suisse, for example, China boasts only 0.6km of rail track per citizen, versus 9.3km in (car-loving) America. Beijing can merrily keep spending on productive investments for years.

On the private side, building proper social security systems, a work of years if not decades, should gradually release pent-up consumer demand. Mr Elston says he has no idea what will happen in the next few quarters. But he is confident that in the longer term "Asia will be able to build its own growth [even] without a strong west".

Tigger would be ecstatic. Eeyore would say: "It's going to be a long haul."

Copyright: The Financial Times Limited 2009

David Pilling, FT.com
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