The big question is what happens to China. The consensus view projects China in an enviable position: GDP growth is slowing to a still-fabulous 9 to 10 per cent or so, inflation is receding and the external accounts remain in healthy surplus.
However, some signs of trouble are ahead. Export growth is weakening: tens of thousands of export-oriented companies in southern China have gone out of business as a result of falling demand, rising costs and the challenges of dealing with tougher enforcement of environmental and labour laws.
Transactions in the real estate sector have fallen sharply, and there’s anecdotal evidence of distress in real estate in some locales although the national numbers do not reflect that. China’s largest banks were re-capitalised, with their balance sheets cleaned up several years ago, a large portion of the country’s lending market goes unregulated. It’s not clear how that unregulated lending market will hold up as asset prices tumble, economic growth decelerates and hot money stops flowing into China. Our view is that the risks in China are certainly higher than markets realise.
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Despite these challenges, the developing economies of Asia as a whole are likely to remain on a sound footing and could find opportunities. Economic growth will slow, but there are enough engines of growth to keep GDP growth at reasonable rates for the next fiscal year.
Since the 1997-98 Asian financial crisis, Asia’s banks remained cautious in the recent global boom. As a result, they have little exposure to the toxic assets that are bringing down their counterparts in developed economies. Asian sovereign wealth funds have grown in size as well and will be major players in global finance in coming years. Asia’s high savings rates mean that other Asian financial institutions will have cash to pick up assets in the crisis-hit developed economies.
The question remains on just how large a stake Asian financial institutions will acquire in US and European financial sectors. We have already seen Japan’s Nomura and Bank of Tokyo Mitsubishi-UFJ Bank making acquisitions. Sovereign wealth funds from Singapore and China have taken stakes in some large US and European financial institutions. However, we suspect that there’s a limit to what Asian financial institutions can do in this crisis. While they have access to large financial resources, most Asian banks lack the breadth and depth of management talent and the strong institutional processes needed to successfully take over large and sophisticated financial institutions in developed economies. More likely, Asian banks and sovereign wealth funds might be part of consortia that take over such institutions.
Economic conditions in coming months will be among the toughest Asia has had to manage since the Asian crisis a decade ago. But, Asia today is far more robust than in the 1990s, helped by strong external balances, massive foreign exchange reserves, more diversified export bases and reformed banking sectors. Sure, there will be one or two countries with financial vulnerabilities or with confidence-sapping political problems that could suffer more than others but by and large Asian economies will continue growing and rebound strongly once the global crisis ends.
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