Change in Asian mindset needed to sustain recovery

Developing a stronger culture of domestic consumption is crucial to AsiaÆs growth, Standard Chartered's Asia CEO, Jaspal Bindra, argues in this contributed view point article.
 Jaspal Bindra
Jaspal Bindra

A news piece from last year about an elderly Chinese man whose life savings were eaten by mice tells us two things; firstly, that the stove, as in 80-year-old Yang Lihong's case, isn't exactly a safe piggy bank. Secondly, and more importantly, it highlights the norm among Chinese households to stash away cash with the intention of saving for a rainy day. 

Thrift is a value promulgated throughout much of Asia, especially China, and that in large part explains the country's high savings rate, estimated at around 40% of gross domestic product. Consumerist culture has no doubt caught up in recent years, but for the Chinese economy as a whole, the propensity to save outweighs the willingness to spend. The "100 yuan a week" campaign made famous by 24-year-old Chinese photographer Wang Hao on his blog shows that even those from the so-called Generation Y in the 1980s can take pride in being frugal.

Unfortunately, this is not what the world requires; what is most needed today is a more even balance of the consumer psyche between Asia and the West. There's pressing need for the West to save more and Asia to spend more. The world economy is on the mend and improving economic data across Asia -- the rebound in South Korea with three successive quarters of growth merits attention -- suggests the region is set to enjoy steady growth in 2010. But one will be wise to tread on the side of caution when it comes to the global outlook. No doubt the quick-fix remedy -- combining massive liquidity injections, fiscal spending and low interest rates -- have worked to stave off a prolonged global depression. That now leaves us with the questions: How sustainable is global economic growth? If it is sustained, how strong will growth be? And, how soon can policy be tightened?

The US economic picture has improved -- Standard Chartered Bank's global research forecasts US real GDP growth at 2.3% in 2010 from a contraction of 2.4% last year -- but it is still too early to celebrate the recovery. For certain, any recovery will be very slow and gradual, particularly in the developed economies. We may even see a dip on the road to economic recovery. US household and business confidence have been shaken so hard that a private sector recovery is likely to be sluggish and consumer spending weak in 2010.

That is where the trouble for export-dependent Asia lies, because the region's exporters have to live with smaller orders if their biggest customers are grappling with rising debt, layoffs and wage cuts.

The financial crisis has also shown that a "decoupled Asia" was a myth, even though prompt economic stimulus and sound fiscal positions provided the buffer that enabled Asian economies to ride out the storm in fairly good shape. Although year-on-year export figures should start to improve for many Asian countries, export levels will remain below pre-crisis levels for as long as the US economy is struggling to get back to top form.

Economic forecasts for Asia continue to be revised higher. The International Monetary Fund (IMF) in October 2009 raised its 2010 GDP growth forecast for the region to 5.75% from the 4.3% that was estimated in May. According to the IMF, the Chinese economy is estimated to have grown 8.5% in 2009 and is projected to grow by 9% in 2010. The fact that the Chinese economy would stay in expansion mode is beyond anyone's doubt. But one should bear in mind that the world is a $61 trillion economy and China is only $4.4 trillion of that. The US, EU and Japan together account for more than half of the global economy, while the BRIC countries (Brazil, Russia, India and China) together make up less than 15% of global GDP. Therefore, the job of getting the global economy back in shape is not something that Asia alone can do.

In economies like Hong Kong, Taiwan, Korea and Singapore, painful memories of the crisis seem all but forgotten by consumers who have loosened their purse-strings following the rebound of equity and property markets. With expansionary fiscal policy and initiatives such as Singapore's Jobs Credit Scheme helping to limit unemployment in many Asian countries, banks were able to step up lending to households even when lending to businesses fell. Asset price inflation did have the benefit of a positive wealth effect that was instrumental in keeping household spending afloat while the economy was fragile. But with excess liquidity flowing into equities and property and asset bubbles starting to form, the pressure is on for policymakers to tighten monetary policy.

While a number of countries, including Israel, Norway and Australia, have hiked rates, the dilemma for many countries is that tightening early may be tantamount to opening the floodgates to hot-money inflows, while holding back may fuel asset price inflation. In China, when prices move up in 2010 - we expect consumer price index inflation to reach 3% year-on-year in the second quarter - the response is likely to be both credit guidance and rate hikes. Overall, however, we expect policy to remain supportive and do not think the policy adjustment in the coming quarters will disrupt the recovery or result in significant credit squeeze.

A related issue is that of the stability of the Chinese yuan against the US dollar, a situation that is compelling many Asian countries to keep their currencies stable in order to maintain export competitiveness, thus leaving floating currencies, particularly the euro, to take the strain vis-à-vis a weaker dollar. While there is pressing need for Asian countries to allow their currencies to appreciate, most will be unlikely to do so until they are confident that a recovery is truly underway.

It is, in short, a difficult balance that policymakers have to strike: continue to provide support to their economies until they are assured of a recovery, but not maintaining it for so long that it triggers inflationary pressures or undermines the region's new-found reputation as prudent fiscal managers. The reality check for Asia will come when government stimulus eases, and the key challenge will be to ensure balanced and steady growth in the face of weaker export demand from the US and Europe. There will also be a need to deal with rising protectionist pressures globally, as the Apec (Asia-Pacific Economic Cooperation) summit in Singapore last year highlighted.

It is crucial that Asia develops a stronger culture of domestic consumption as a growth driver. The process is underway: Standard Chartered Bank's Asian retail sales index, which includes data from eight Asian economies, grew by 9% year-on-year in August, or 2.2% year-on-year excluding China. This is a positive start since the general perception is that Asian consumption cannot improve before exports rebound. The reluctance of Chinese households to spend has been attributed to factors such as their financial and social insecurity. Efforts to unlock savings will hinge on reforms in the areas of health care, education, housing and consumer finance, but these will take time, as will the structural reforms that are needed to ensure a smooth reallocation of resources as the export-oriented economy is transformed into one that emphasises private domestic demand.

The world economy certainly has a long way to go, but we remain hopeful of the Asian miracle.

Jaspal Bindra is the Asia CEO of Standard Chartered.

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