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    Volume 9 Issue 11| March 12, 2010|

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How sustainable is the Asian growth model?

The recent financial crisis saw a global synchronised boom turned into a synchronised bust.

Prinn Panitchpakdi

It was partly fuelled by excessive credit growth and low costs for risk takers. The mercantilist instinct of North Asian economies as the likes of China, Japan and Korea pursued a cheap currency and full employment policies while the monetary marvels of the West gladly supply a loose lubricant for a deflationary environment.

The over consumption binge in the US went up to over 70 per cent of GDP. In fact, it took a couple of collapses of some of the biggest financial institutions for us to realise that the party was truly over.

Some of the Asian economies like China, India and Indonesia in particular escaped with swift government stimulus supports and resilient domestic consumptions leading some to dream of a decoupling in fortunes from the West.

It was perhaps an incremental decoupling but one in which the East cannot rest its laurel on. The recovery in the US will not be normal for the next couple of years. There is then little chance that interest rate in the West will normalise any time soon and this zero interest rate policy has the potential to destabilise Asia and create an asset bubble especially if the Asian currencies remain undervalued.

The Chinese know what they have to do but the appreciation of the Yuan is a sensitive subject and China certainly does not want to be seen as acting under pressure from the US. They will also want to see exports stabilise and grow successive month on month before embarking on a gradual appreciation. With the easy money flowing into Asian assets, there seems to be a one-way bet for significant appreciation in the values of Asian currencies.

The size and wealth of the Chinese economy may not be big now relative to other developed economies but this is where the highest incremental growth will come over the next 3 to 5 years. The positive divergence from the West will be led by China-centric Asia and while there are some encouraging signs that Asian governments are attempting to formulate policies towards domestic demand driven model, a few speed bumps lie ahead and the transition will never be an easy one. It is one thing to be leaders in manufacturing, quite another to be one of the global services leaders. No matter how tough or painful the transition will be, the Chinese will be left with no choice but to shift its economy up the value chain. A few years ago not many may have heard of Lenovo, Haier, Alibaba, Air China, and CCTV these may become some of the household names in the near future.

China is thirsty for resources and the regional integration process will speed up for they have mutual benefits at stake. Thus, Thailand 's exports to China grew by almost 100 per cent in January and by 67 per cent to Asean destinations while it only grew 16 per cent to the US.

Similar statistics can be seen across Asean countries and this will be amplified with the aim to "feed" China.

The Asean+6 will work towards a trading bloc and the East Asian community rivalling that of NAFTA and the EU. One must also not forget the rising aspirations of the Arabs as they look away from the West and its rediscovery of China via 'the new silk road'. The development of these relationships will drive the next phase of global growth but each Asian nation will still need to look for substantial internal reforms to drive growth over the long term. A global economic upswing can make an open economy look good for a while but you will still need to tackle reforms on education, pension, jurisdiction and environment if you want to stand tall on your own.

All roads may lead to China at present but one cannot assume the sustainability of one's economy on this forever. We have seen the key demand and investment forces changing from Japan in the '80s, to US in the '90s and China in 2000s. The Asians should be prepared no matter who will be in the driving seat for this decade.

Prinn Panitchpakdi is a senior regional equity with CLSA Limited, a leading investment bank based in Hong Kong.


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