Economy of Asian region under the U.S.

financial crisis

Ladies and Gentlemen: Good afternoon, I am really appreciated to be invited to participate in this Financial Security workshop of Asia-Europe Business Forum. Just now, we have got the cause of US financial crisis from Dr. Jacques GRAVEREAU, and next I just want to talk about the economy of Asia and China with the shock of the financial crisis. After years of red-hot growth, the region is bound to decelerate sharply. So far this year, fading demand in the EU and the US has had a negative effect on Asia: thats, export growth stopped accelerating through this summer. As the financial crisis in the West grinds on and takes its inevitable toll on growth there, Asia will see its exports slow quite sharply, dragging growth down with it. In addition, the recent turmoil has once more shown that, global financial markets are ever more tightly integrated, and the region has seen capital markets and currencies sell off in sympathy with markets elsewhere. This, in turn, suggests that domestic demand in Asia will also suffer, as the negative wealth effect is weighing on consumption, and adverse financial conditions may hamper the ability and willingness of firms to expand investment. Its easy to make the case for a hard landing in Asia, especially at a time when trading slowed down sharply. In fact, we dont think the landing will be quite as troublesome, and believe that the region remains better placed than others to benefit from the ultimate recovery in confidence. This does not mean the region will not slow, it certainly will. But, growth should stay positive and, after a sharp deceleration, expect growth to return swiftly enough to more accustomed levels. Here are five key points to maintain your confidence on the Asian region. First, domestic demand should continue to provide a concrete pillar. In most markets, private investment and consumption account for the bulk of GDP growth. There is, in fact, no evidence that export growth is leading domestic demand growth in Asia. Inflation has sufficiently receded, at least for the time being, thus removing any threat to household spending. Labor markets across the region are still tight, and wage growth solid, so that an imminent collapse in private consumption is not on the cards. Second, investment should hold up well reasonably assuming that local
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financial conditions do not deteriorate further, which we currently do not expect. FDI inflows are likely to slow as multinationals put expansion plans on hold for lack of funds or a general reluctance to take on risk. However, public investment spending may take up much of the slack. Already, Korea, Chinese Taipei, China, the Philippines, Thailand, and Malaysia have announced ambitious new plans to support spending. Third, and most importantly, Asia does not suffer from the same structural financial dislocations plaguing the West. Banks in the region will tighten their credit standards, for sure, but an aggressive retrenchment of balance sheets appears unlikely for the time being. Herein lies perhaps the biggest strength for Asia and perhaps an ironic one since the region has seen its fair share of banking crises over the years. If we can trust the numbers, and we think one can, direct exposure of Asian banks to toxic assets piling up in the West is minimal. Here and there, of course, and Korea certainly comes to mind, financial institutions are sensitive to wholesale funding conditions and the global turmoil hurts from that angle. But, by and large, there is no reason to expect the financial transmission mechanism to break down in the region, so that, after global risk aversion recedes, credit should again be flowing in Asia. Fourth, China and India should stand tall amid the storm. As you may know, 3rd Quarter data of Chinese economy was unveiled on Monday, confronted with maybe the most serious financial crisis from the 1930s, its really amazing for Chinese economy to continue to grow with 9.9% in the last three quarters, much more faster than US and Euro zone, and we still expect a 9.6% growth rate of 2008. Even if exports slow, officials have sufficient fiscal and monetary policies to tide the economy over. Note that growth is rapidly shifting away from the coast, so that any reports of slumping demand in these formerly booming areas exaggerate the impression of Chinas impending growth downturn. Similarly, growth in India should hold up at 7.1%, with falling oil prices and the interest rate cut. Last but not the least, with world growth slowing to 2.4% as we forecast, commodity prices should come off, and the headline inflation pressures will go down with them. As worries shift to growth and CPI heads down, we expect Asian officials to shift to easing mode next year, and the region will enter into a forthcoming rates-cut cycle. This should help support growth, assuming that banks pass on the good news to their borrowers. In conclusion, we expect GDP growth in Asia, excluding Japan, to slow from a red-hot 9.5% last year to 7.7% this year and 7.2% in 2009. This, for sure, is a sharp jolt to growth, and it will feel like a major slump. But,
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all considered, this is still a respectable rate of growth. Much of the strength here can be explained by China and India, with the smaller markets slowing proportionately more, not least because export tend to play a bigger role. Excluding the three largest economies, we forecast Asias GDP growth to slow from 4.5% this year to 4%, with Korea, Chinese Taipei, Thailand, and the Philippines seeing growth rates fall well below 4% in 2009. That all, thank you!