The Philippines may have better medium-term growth prospects than China. From Beijing to Kuala Lumpur, cheese is in greater demand than iron ore. The Nehru-Gandhi family has lost control of India. About the only thing familiar in the topsy-turvy Asian world is that the generals are back in charge of Thailand.
Asia, in so far as one can talk of such a huge, disparate region, is in flux. After years in which it settled into a fairly predictable pattern, the gears of change are grinding. Since the 2008 financial crisis, there have been several constants.
China was growing rapidly, becoming the region’s engine of growth. Cheap money and low interest rates, courtesy of western printing presses, enabled many countries to ramp up borrowing, stimulating the domestic demand needed to replace flat exports. Domestic politics, with a few exceptions such as Myanmar, was pretty stable. Now, none of the above holds. The region is entering a new phase.
Carmen Reinhart, a Harvard professor who has made a career of studying financial crises, says the “longest capital flow bonanza on record” – one that kept much of emerging Asia humming from 2008 to 2013 – is over. The “push” factors that forced capital out of the west in search of higher yield are going into reverse. And the withdrawal of capital from emerging Asia will not be accompanied by a compensating rise in demand for its exports.
Recovery in the west, hampered by a big debt overhang, will be anaemic, she says. Astonishingly, some western economies will not be back to their pre-2008 output levels until 2018 or beyond. That will accelerate the convergence of living standards in many Asian economies with those in the west. But it also means this will be a largely tradeless recovery.
Some Asian economies could be in for a bumpy ride. Most have high foreign reserves, the absence of which was the main cause of the last Asian financial crisis. But lightning rarely strikes in the same place twice. New problems could emerge from the build-up of private debt, the result of years of easy money. Prof Reinhart highlights South Korea (with a debt-to-output ratio of 103 per cent), Singapore (105 per cent), Thailand (127 per cent), Malaysia (134 per cent), and Hong Kong (a whopping 208 per cent).
China, with its “netherworld of subnational debt” is too murky to calculate, she says. That, plus the country’s outlandishly high investment ratio, leads her to doubt Beijing’s ability to manage a soft landing. If Chinese growth does indeed slow faster than expected, she predicts contagion via lower commodity prices and a general re-rating of emerging markets.
You do not need to buy the idea of rapid slowdown or financial crisis to accept things have changed. The list of best-performing Asian economies now includes some unlikely names. The Philippines, the region’s perennial laggard, is growing at 7 per cent. It has low debt, low inflation and a young, expanding workforce that will add a percentage point to growth each year, just as China’s shrinking one will shave off 0.4 percentage points. Sri Lanka, for years at war, is also growing at 7 per cent. As if to underline the shock of the new, Japan – growing at 5.9 per cent – is outpacing India, even if that is just a one-quarter aberration resulting from a tax change.
As China slowly moves away from investment towards consumer-driven growth, demand is shifting from what one analyst calls “mining to dining”. With the supercycle in hard commodities over, the premium on softer ones – dairy, meat, fish and grains – has risen. Last year New Zealand grew faster than Australia. Such is the demand for dairy products to feed Asia’s growing middle class that “cheese wars” have broken out, with companies paying unlikely multiples for the chance to get their hands on a bit of cheddar.
A Chilean banker recently accosted me at a conference to boast of his country’s booming exports to China – not of copper but of plums, berries, beef, salmon, trout and chicken feet.
If the economic shifts were not enough, Asia has been transformed politically. By July, when Indonesia will join China and India in choosing a new leader, Asian countries with a combined population approaching 3bn will be under new management. In the case of Narendra Modi that could plausibly lead to a pick-up in Indian growth. In Xi Jinping’s case, it marks the reverse: an acceptance that China is better served by lower but better quality growth.
Finally, Mr Xi’s more steadfast foreign policy is having regional spillover effects, most recently in Vietnam, where workers attacked dozens of factories with perceived Chinese links, angered by the country’s decision to drill for oil in disputed waters .
As Chinese wages rise, companies from Japan to the US are looking for countries where they can productively – and safely – base their lower-end manufacturing. If Thailand cannot solve its long-running political fiasco, it may no longer be one of the leading choices. In Asia, as in investment, past performance is no guide to future returns.
By David Pilling UK Financial Times