Divining the future prosperity of Asia through tortoise shells and tea leaves of the past or market indices of the present yield equally questionable results. Talk of an Asia-led global recovery, based principally on stock market performance and a very modest uptick in exports to China, overstate the effects of stimulus spending and the as yet unsolved restructuring challenges ahead for most of the export-oriented region.
The sudden though not unexpected "correction" in the Shanghai index of almost 20% this month indicates increasing volatility in the waning days of the initial Chinese government stimulus plan. Concerns over bank lending leakage into the stock market and tightening measures underway signal the end of easy money.
The Nikkei 225, Seoul Kospi and Hang Seng indices have been going through swings of roughly 10%-20% over the last several months, albeit in a general upward trajectory. Yet unemployment remains high, exports have plummeted, and the threat of a double dip recession looms larger absent significant Western demand. Much of Asia's fundamental overreliance on exports and the distorting effects on their domestic economy remain unchanged.
Meanwhile the U.S. Dow Jones and S&P 500 indices have moved largely in tandem with their Asian counterparts indicating, at least as far as investor sentiment goes, we rise and sink together though a rising tide lifts all boats unequally.
Statistics, however often tell a distorted version of the story as any attendee at an economic forecasting conference can attest. Assessments of the same economic data often have completely contradictory interpretations. The Shanghai composite index has been both highest and lowest performer versus the S&P 500 within the last 12 months. Picking the time frame to support a preconceived conclusion is a time-tested and deceptive statistical practice in widespread use today.
Other anecdotal evidence is proffered to suggest that China truly does defy economic gravity. Consumer spending is up 15%. The highly anticipated unemployment problem, and potential civil unrest, never materialized. Chinese banks, unlike their U.S. counterparts, were actually lending the money they've been given by their government. Imports of raw commodities have also risen and to the optimists who view all Chinese data as proof positive that centralized controlled-growth is the new global paradigm, domestic consumption appears strong.
Yet these same basic facts have a back-story interpretation—the 15% figure is not true "consumer" spending as most economists consider it. The Chinese figure includes sales of intermediate goods and government buying so it remains unclear how much purchases are actually increasing absent stimulus. When the flood of government spending recedes little sustainable change may have been achieved.
Unemployment concerns have abated but primarily because factories have been incentivized to hire on excess labor with government support. How long worker subsidies can continue remains questionable and a year or longer of sub-par wages likely won't keep these laborers gainfully employed.
As for bank lending the scale and speed has truly been extraordinary, but loan quality is suspect. High-speed rail lines make good economic sense, but expensive real estate developments in heavily urbanized coastal cities, that largely go unoccupied because investors are seeking to flip them as prices rise, not nearly as much. There is little indication that any significant progress is being made to fundamentally restructure the Chinese economy, putting it on a more sustainable foundation based principally on a robust middle-class consumer base.
Absent this demand the U.S. as buyer of first resort still remains the principal engine of the global economy. Concerns over the U.S. consumer's propensity to purchase remains as a darkening cloud reappears on the horizon -- namely the roll-over of more short-term adjustable rate mortgages into higher interest rates and another wave of foreclosures. A return to healthy U.S. employment levels remains a considerable ways off. Without a housing and employment recovery consumer demand will not improve significantly.
The real measure of an Asia recovery continues to be the degree to which stimulus money has been well spent on productive elements of the economy that contribute to longer-term growth. Good paying jobs and critical infrastructure necessary to sustain development risk being obscured by politically motivated pet projects and misguided investment priorities.
The greatest impediments to attracting investment are less about roads and electricity, and increasingly the pernicious affect of corruption, lack of transparency, inconsistent application of laws and protection of intellectual property rights. Until countries in Asia invest heavily in these areas the next stage of more advanced economic development will continue to be just out of reach.
Muddling through may simply keep growth going until a U.S. led recovery fills the sails of exporters again, but the Olympic sized dreams of Asia, and most focus on China, leading the world out of uncertainty fail to match economic reality.
While the specter of depression is behind us and the fall in global output has slowed considerably, the economic hole into which we have fallen will take considerable time to climb back out of and the route is clearly not straight up. If policymakers focus on the fundamentals rather than wishful interpretations of tea leaves and market indices we may yet see a solid 2010 recovery in the making.
Brian P. Klein was a 2008-2009 Council on Foreign Relations Fellow based in Tokyo.
Comment:
From the Editor
Posted August 31, 2009
Divining the future prosperity of Asia through tortoise shells and tea leaves of the past or market indices of the present yield equally questionable results. Talk of an Asia-led global recovery, based principally on stock market performance and a very modest uptick in exports to China, overstate the effects of stimulus spending and the as yet unsolved restructuring challenges ahead for most of the export-oriented region.
The sudden though not unexpected "correction" in the Shanghai index of almost 20% this month indicates increasing volatility in the waning days of the initial Chinese government stimulus plan. Concerns over bank lending leakage into the stock market and tightening measures underway signal the end of easy money.
The Nikkei 225, Seoul Kospi and Hang Seng indices have been going through swings of roughly 10%-20% over the last several months, albeit in a general upward trajectory. Yet unemployment remains high, exports have plummeted, and the threat of a double dip recession looms larger absent significant Western demand. Much of Asia's fundamental overreliance on exports and the distorting effects on their domestic economy remain unchanged.
Meanwhile the U.S. Dow Jones and S&P 500 indices have moved largely in tandem with their Asian counterparts indicating, at least as far as investor sentiment goes, we rise and sink together though a rising tide lifts all boats unequally.
Statistics, however often tell a distorted version of the story as any attendee at an economic forecasting conference can attest. Assessments of the same economic data often have completely contradictory interpretations. The Shanghai composite index has been both highest and lowest performer versus the S&P 500 within the last 12 months. Picking the time frame to support a preconceived conclusion is a time-tested and deceptive statistical practice in widespread use today.
Other anecdotal evidence is proffered to suggest that China truly does defy economic gravity. Consumer spending is up 15%. The highly anticipated unemployment problem, and potential civil unrest, never materialized. Chinese banks, unlike their U.S. counterparts, were actually lending the money they've been given by their government. Imports of raw commodities have also risen and to the optimists who view all Chinese data as proof positive that centralized controlled-growth is the new global paradigm, domestic consumption appears strong.
Yet these same basic facts have a back-story interpretation—the 15% figure is not true "consumer" spending as most economists consider it. The Chinese figure includes sales of intermediate goods and government buying so it remains unclear how much purchases are actually increasing absent stimulus. When the flood of government spending recedes little sustainable change may have been achieved.
Unemployment concerns have abated but primarily because factories have been incentivized to hire on excess labor with government support. How long worker subsidies can continue remains questionable and a year or longer of sub-par wages likely won't keep these laborers gainfully employed.
As for bank lending the scale and speed has truly been extraordinary, but loan quality is suspect. High-speed rail lines make good economic sense, but expensive real estate developments in heavily urbanized coastal cities, that largely go unoccupied because investors are seeking to flip them as prices rise, not nearly as much. There is little indication that any significant progress is being made to fundamentally restructure the Chinese economy, putting it on a more sustainable foundation based principally on a robust middle-class consumer base.
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