The bull run will continue, says ING economist

Tim Condon says China's trade surplus will continue to put downward pressure on Asian bond yields.
"We donÆt think the bull run is overö, says ING chief economist for Asia, Tim Condon, and bond yields, which are at historic lows, will continue to stay that way.

ôTwo years ago, our global outlook for 2006 was as positive as we could ever recall. We said the same last year, and we say the same today,ö he continues.

With a global growth forecast close to 5% this year, Europe and the rest of the world are offsetting any slow-down in US economic performance. For the first time, China is due to displace the US, with an estimated $700 billion contribution to the global economy next year.

China's trade surplus û which Condon termed ôChina export shockö û is ever-growing, and has very powerful implications for financial markets as well as for the real economies of Asian countries. It is this trade surplus, or in other words ChinaÆs savings glut, which is putting downward pressure on Asian bond yields.

ôThe trade surplus is keeping government bond yields low and pushing people into the financial markets. It is a powerful drive of risky asset price appreciation in Asia.ö

But the real story of this savings glut is, Condon believes, a story of Asian economic integration. To illustrate, Condon broke down China into its 23 provinces alongside other Asian economies. Five out of 10 provinces ranked amongst AsiaÆs top producing economies. Guangdong province, with a population of 93 million and an estimated GDP of $389 billion, ranked third behind Korea and Indonesia, beating Taiwan, ranked fifth. Shandong province, ranked sixth, will overtake Taiwan in 2008, ahead of Thailand and Hong Kong.

ôEconomic integration, not only within China but with other economies, is happening at a very fast rate.ö ChinaÆs trade share with Taiwan has increased by almost 7% since the onset of the "China export shock". This figure stands at between 3% and 4% for Korea, the Philippines, Pakistan and Singapore," says Condon.

ôThese are huge surges in ChinaÆs trade share. It is restructuring economic relations around Asia. Gains from trade are stimulating very rapid productivity growth around the region, which is the source of buoyant GDP growth.ö

How long will ChinaÆs trade surplus continue to widen? Condon selected a historical parallel from Japan which, like China, had a surge in its trade surplus beginning in 1982, and may provide a base for thinking about China. He showed a chart which depicts the index of the 12-month rolling sum of JapanÆs and ChinaÆs monthly trade surplus, measured in US dollars. ôBased on this model, these buoyant conditions û basically a liquidity-driven rally in financial assets - could last for the next one to two years,ö he says.

The big risk to this picture is less a recession in the US than one in Europe, Condon believes since Europe is displacing the US as a top export destination.

ôWe have seen a boom of exports within Asia and towards Europe, versus very sluggish exports to the US. If Europe were to slip into recession, we would revise our export growth forecast for Asia and GDP growth figures, but at this point, that is not our base-line scenario."
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