Eastern Promise
Despite the credit crisis, China is keeping much of the Asian economy going. Here we consider, from three perspectives, the issues facing China and the Asian region as the world slows down, and the implications for investors
The Economist's View
David Smith on China as the world's economic locomotive
The real world often moves a lot more quickly than anybody expects. When I wrote my book on the rise of China and India, which was published last year, the expectation was that China would only gradually come to acquire the status of global economic superpower. But with America and Europe mired in the current credit crunch, it is China that is keeping the world economy afloat. It is China too that has been taking a good deal of the blame for driving oil and other commodity prices higher, to the discomfort of Western consumers.
America and Europe may come back but, for the moment, China is pulling the global economy along.
Other economies within Asia look to China to provide the impetus for growth, and strong rising Chinese demand has effectively transformed the revenues of commodity producers based in Africa and elsewhere. The Organisation for Economic Co-operation and Development (OECD) predicts economic growth of 10 per cent for China this year, slowing only slightly to 9.5 per cent in 2009, and expects China to continue to grow in line with its average of the past two decades. Until recently, the view was that if the American economy sneezed, China - with its dependence on exports - would be the first to catch a cold. But America is doing more than sneezing, and yet the effect on China's economy has, so far, been quite limited.
Indeed, with China leading the way, emerging economies are now growing strongly; 'non-OECD' growth is expected to be 7 per cent both this year and next. Typical forecasts for India are 7.4 per cent growth this year and more than 8 per cent next year. Hong Kong is expected to continue growing at a rate of 5 per cent, Vietnam and Indonesia at 6 per cent or more, and South Korea and Thailand at a rate of between 4.5 and 5 per cent.
Advanced countries are, however, struggling. The OECD's projections over two years are for growth averaging just a little over 1 per cent annually for the USA, and approximately 1.5 per cent growth for both Europe and Japan.
One reason for China's still-high level of growth is that it is now becoming less dependent on exports and, as the OECD states: "Domestic demand growth is projected to remain robust over the forecast horizon, with buoyant incomes driving up consumption." This is not an accident. The Chinese authorities plan very carefully and part of the aim of the current five-year plan (2006-10) was to "attach more importance to the expansion of domestic demand".
Asia is becoming a hub of economic growth, capable of sustaining a strong rate of expansion even when the rest of the world is weak. A report from the Asian Development Bank calls this 'Asian regionalism', noting: "Today, Asia trades about as much with itself as Europe and North America do with themselves." One day, it suggests, there could be a single Asian economic community, which will be similar to the European Union or the North American Free Trade Agreement.
This does not mean that China and its Asian economic partners do not face certain challenges. The Chinese economy is feeling the effect of rises in commodity prices, even though it has contributed to this situation. Indeed, in China and much of Asia, inflation is expected to reach an uncomfortable 6.5 per cent this year.
As Jing Ulrich, a China economist with JPMorgan, points out: "China's financial strength has allowed it to steer a path through the international credit crisis and domestic disasters... China's current economic conditions are considerably better than they were during the past boom-bust cycles, but tighter integration with the world economy means that the country's domestic inflation now sends global ripples." And when you are pulling along the rest of the world, that matters.
David Smith, one of Trust magazine's regular contributors, is economics editor of The Sunday Times and author of The Dragon and the Elephant.
The Investment Editor's View
Heather Connon on Asia's emerging markets and their potential for the future
Five years ago, British and American companies accounted for almost the entire top 20 of Forbes' Global 2000 survey of the world's largest companies, ranked according to their market value. This year, they accounted for just 11 of the top 20, while China now has four appearing in the same list - including Petrochina, the oil and petrochemicals company, which has topped the Forbes ranking by market value.
That partly reflects the collapse in both UK and US stock markets, but it is also testament to the growing importance of China and the rest of Asia to the global economy. In 2004, just 25 of the world's top 2000 companies were Chinese; four years later, that number has increased to 70.
While British and American consumers are over-indebted and over-spent, the Asian population is growing increasingly wealthy and willing to spend more. Asian economic growth outpaces that of Western economies by far - the estimated 11.4 per cent growth for China in 2007 compares with just 3.1 per cent here. Asian companies, too, are in better shape than many Western ones. While even our most conservative of banks have found themselves holding over-valued SIVs (structured investment vehicles), CDOs (collateralized debt obligations) and other complex financial instruments that have been affected by the credit crunch, it appears that Asian banks have had relatively little exposure to them.
That is reflected in the performance of the region's stock markets. While, over the last year, there has been little to choose between Asian and Western stock markets, the longer-term performance in emerging markets has been far better than that of larger economies like the UK and USA.
Over the last decade, the MSCI Asian index, excluding Japan, has risen by 115.1 per cent, comfortably ahead of the average for stock markets across the world - up 4.3 per cent as measured by the MSCI World index - or Europe and the USA, down 2 and 6.6 per cent respectively, as measured by the MSCI Europe Growth index and S&P Composite index. |
|
COMPARING GROWTH FORECASTS |
Country |
Real GDP Growth Forecasts (%) |
|
|
2007 |
2008 |
2009 |
2010 |
Source: Standard Chartered Global Focus, July 2008
*Fiscal year data: fiscal year starts in April in India and ends in June in Bangladesh and Pakistan |
Australia |
4.3 |
1.7 |
2.7 |
3.4 |
Bangladesh * |
6.5 |
6.0 |
6.0 |
6.5 |
China |
11.9 |
9.9 |
8.6 |
8.0 |
Hong Kong |
6.4 |
4.6 |
5.0 |
5.9 |
India * |
9.0 |
7.4 |
8.5 |
9.0 |
Indonesia |
6.3 |
6.0 |
6.2 |
6.5 |
Japan |
2.1 |
1.2 |
1.5 |
2.2 |
Malaysia |
6.3 |
4.8 |
4.0 |
5.0 |
New Zealand |
3.1 |
1.5 |
2.7 |
2.3 |
Pakistan * |
7.0 |
5.8 |
5.5 |
6.0 |
Philippines |
7.2 |
3.5 |
4.1 |
5.3 |
Singapore |
7.7 |
3.5 |
4.0 |
5.5 |
South Korea |
5.0 |
4.5 |
5.0 |
6.3 |
Sri Lanka |
6.7 |
6.3 |
6.0 |
6.1 |
Taiwan |
5.7 |
3.5 |
4.8 |
6.0 |
Thailand |
4.8 |
4.7 |
4.5 |
5.3 |
| Vietnam |
8.5 |
6.7 |
6.0 |
7.5 |
|
However, it hasn't all been plain sailing for investors, as investing in emerging markets can be a volatile experience. The performance of China's stock market is an illustration of the warning that share prices can go down as well as up; over the two years to July 2008, MSCI's Zhong Hua index, which measures China and Hong Kong share prices, almost doubled in the 15 months to October 2007, before losing nearly one third of this gain in the following nine months.
Japanese investors too know all about rollercoasters; shares soared in the 1980s as companies like Sony and Honda became global giants. Since then, however, the country has been dogged by deflation and slow growth and investors have endured numerous false dawns as the stock market staged a recovery, then fell back again.
Such gyrations are understandable. By definition, Such gyrations are quite understandable. By definition, emerging markets are only just developing the corporate and political systems that are well established in developed countries and many of their companies are also relatively new to the stock market - China is only just starting to sell shares in some of its state-controlled institutions such as Petrochina, making it more vulnerable to unexpected events, like the debt crisis that engulfed Asia a decade ago.
Like other emerging markets, Asian stock markets are often more influenced by retail investors than the large pension funds and other institutions that tend to account for the bulk of trading on the well-established UK and US stock markets. In Taiwan, for example, more than 50 per cent of trades can be retail on some days.
If the region's economy continues to grow at the same pace as it has in recent years, it will not be long before the Chinese and other Asian emerging markets are as effective at raising capital and as mature as our own.
Heather Connon is investment editor of The Observer.
The Analyst View
Richard Sneller explains why Asia without China is like a Porsche without its engine
What is happening in China is often wrongly described as a new industrial revolution. In fact, what China is actually experiencing now is both an industrial and a service revolution. It is a great leap forward, and the proximity of some of the most sophisticated consumers in the world in Korea and Japan adds a rather exotic twist to China's development.
Increasingly high expectations for products and services and a keenness for continuous improvement and innovation in neighbouring countries have spilt over into China, driving extraordinary levels of productivity growth. Forget the cheap and cheerful 'Made in China' plastic toys - welcome to the world of 'Diamond' handsets and magnetic levitation trains.
Brands are important: sales of Hermes and luxury cars are seeing substantial growth and China now has many thriving department stores selling everything from jewellery to branded footwear. Indeed, footwear is a good example of how the retail economy is driving everything forward - Chinese brands are cheaper than global competitors like Adidas.
Another good example is China's telecommunications. Chinese mobile telephony services are arguably more advanced than those here in the UK and almost 10 million people in China are signing up for mobiles every month. Half of the people in rural villages commonly have a mobile phone - China Mobile and Nokia utterly dominate the market in these instances. The networks carry mobile banking too, and efficiencies here are also creating economic advances.
Investors will continue to be surprised by the speed and the extent of Chinese urbanisation. In China these days, rather than the traditional movement of workers progressing from agriculture into factories and then on to shops and services later, people are instead moving straight from the land to college and then on to jobs in the service industry. The country's 'middle class' probably numbers about 150 million today. And with 10 million to 20 million people per annum joining this group of individuals with discretionary spending power, driven by salaries that are growing by more than 10 per cent annually, growth in consumer spending has exceeded 20 per cent so far this year.
Without China, Asia is not going anywhere. It is impossible to imagine Asia without China. It's like a Porsche without an engine. For instance, Taiwan has more than $100bn invested in China. Hong Kong would not live up to its literal translation of being a 'fragrant harbour' without the neighbouring Guangdong Province or its stock exchange, which is the preferred market for international access to Chinese companies. In 2004, 22 per cent of sales at leading Korean electronics company Samsung came from China and this is still a main source of economic growth for the company. Indonesian and Vietnamese raw materials such as tin, nickel and palm oil are all going to China. Vietnam, which has a highly educated workforce and has been a good diversifier, is booming as a result of the overspill in economic demand.
There are some blips on the horizon, though. Asia is a significant importer of oil, so the high oil price will contribute to current account deficits and inflationary pressures. Rising food prices are another problem, because if everyone has to spend significantly more on food and fuel, it slows the overall economy down. Other risks include protectionism and local political situations, but I don't think that these are likely to be significant.
At Baillie Gifford, we tend to focus on the future - three years plus - and any potentially surprising changes. We are bullish on companies exposed to Chinese consumer expenditure, while there may also be opportunities in global energy and raw materials. On the manufacturing side, we focus on capital intensive rather than labour intensive businesses, as salaries and the renminbi continue to rise.
Events in Europe and the USA do have an impact, as we are now beginning to see in Singapore (where headline rates of economic growth have tumbled from over 7 per cent in 2007 to just under 2 per cent in the second quarter of 2008), but it is not obvious where else the knock-on effects might be. Emerging markets now trade in line with developed markets on multiples of profits, yet their medium to long-term profit growth outlook appears to be much better. Should this higher growth profile combine with a re-rating to a premium, the returns just might be super-charged. As they might say at the Porsche testing circuit after some warm up laps, 'you ain't seen nothing yet'.
Richard Sneller is the deputy head of emerging markets equities at Baillie Gifford
Investment markets, including currency exchange rates, can go down as well as up and market conditions can change rapidly. The views that are expressed in this article should not be taken as statements of fact and no reliance should be placed upon these when making decisions about investment. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The information on investments included here does not constitute independent investment research and therefore it is not subject to the protections afforded to independent research.
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