Calyon strategists Mitul Kotecha and Sébastien Barbé have a relatively bullish outlook on Asia. They say regional economies are no longer in free fall -- though they will be tepid until at least 2010 -- and the worst of the crisis appears to be over.
"The economic collapse people feared did not take place," said Kotecha, head of global foreign exchange strategy at Calyon.
Barbé, head of emerging market research and strategy at Calyon, added: "Corporate Asia definitely feels the worst is over."
Calyon estimates that Asia-Pacific gross domestic product will grow by a healthy 4.3% this year. This is down from 6.9% last year, but well above the International Monetary Fund's (IMF) estimate of 1.3%.
Calyon can point to many positive indicators, but also warns that weaknesses remain. The positives include: the 50% rise in equity markets since March, improvement in the purchasing managers' indices in China and Singapore to over 80bps; tightening of credit spreads for corporates to 483bp from a peak of 983bp; and the first manifestations of the region's billions in fiscal stimulus dollars. Still exports to the rest of the world remain down 20% year-on-year, unemployment will likely continue to rise into 2010 and a lot rests on a quick recovery in the US and other developed markets -- an assumption that is far from a foregone conclusion.
"There is not enough sufficient evidence that the recovery process will be rapid or strong. We're only looking for a very gradual improvement in economic activity over the next 12 to 18 months," said Kotecha.
Nouriel Roubini, a professor of economics at New York University and someone who has been extolled for accurately predicting last fall's meltdown, wrote in a recent blog post that the continued worsening of unemployment in the US means other indicators, including real consumption and retail spending, will not recover until at least 2010 or 2011.
Extending Roubini's prediction to Calyon's prognosis for an Asian recovery does not paint a rosy picture. The bank's second half outlook cites a strong connection between Asian exports, including intraregional trade, and demand in Europe and the US. The failure of a quick recovery in either of these regions would likely result in continued hard times for the region's export-reliant economies.
Of the 11 Asia-Pacific countries Calyon tracks, China is by far the best off. Despite a fall in economic growth to 7.5% this year from 9% in 2008, the country's stimulus package has accelerated fixed investment growth to 39% year-on-year in May from 22% last December. In addition, China's much talked-about shift away from export-led growth to domestic demand may be finally coming to fruition.
"Two years ago private demand was driving growth in China," said Barbé. Now growth has shifted away from the private sector to government-led, supply-side growth.
"The quality of growth [in China] has deteriorated significantly," he continued. In his report he asserts that because of this deterioration, if government-driven growth subsides domestic demand could also fall off.
Another issue on everyone's mind is the on-going dollar debate. Last month the People's Bank of China, the country's central bank, reasserted in its annual report the desire of its governor Zhou Xiaochuan to build a supranational reserve currency. Based on the IMF's special drawing rights, the synthetic currency would one day replace the US dollar as the world's leading reserve currency.
But Beijing's messages on currency are mixed. Speaking in Rome last weekend, Xinhua quoted Chinese vice foreign minister He Yafei as saying a shift away from the dollar as the country's leading reserve currency was "not the position of the Chinese government".
"The messages appear to be mixed because China does not want to destabilise the dollar in the short term," said Kotecha. "China is, effectively, in a dollar trap," he said, referring to the country's $1.95 trillion in dollar denominated foreign exchange reserves.
"[The Chinese government] does not want to create a situation where the US dollar collapses because of their comments," Kotecha concluded.
Part of Zhou's plan is to include the yuan in any future supranational currency. Currently, the IMF's special drawing rights include euro, dollars, yen and pounds. In order for the yuan to be included, China must first make the currency fully convertible -- a far cry from where it is today.
Convertibility and tradability limits on the yuan make it an onerous task for a company to take money out of China. The first cross-border yuan-denominated trade transactions with Hong Kong, Macau and to a limited extent Association of Southeast Asian Nations members were only first conducted this week.
"The settlement and swap agreements are China trying to organise the internationalisation of the yuan," said Kotecha. "They are in no hurry to create a more flexible currency. It's a long-term process."
Since December, China has signed five currency swap agreements with Argentina, Belarus, Indonesia, Malaysia and South Korea.