Asia's Overblown Growth Hopes And A 20-Year Bear Market?

Stephen Roach was on a CNBC interview and here is some transcript from the video: Hopes of growth from Asia overblown: Stephen Roach

• Q: How are you mapping economic conditions from hereon for the second half of 2009?
  
  A: Demand remains subdued at a low level and the recovery call is a tough one. It is not that we won't have it, but it is going to be a choppy recovery with periods of improvement followed by periodic setbacks. It will be a little better than an L but a long way away from a V. The markets after having panicked late last year and early this year have recovered from the panic, but now they are going to be rangebound for a while, echoing the choppy pattern in global economy. Asia is very export led, so with that much demand from the developed world, I think it is going to be a lot tougher for Asia than what consensus think. The consensus has fallen in love with Asia as the new engine of the global economy. I think those hopes are overblown at this point.
  
  Q: For the Asian space what happens to external demand and hence growth might be a bit stifled is going to be the key challenge?
  
  A: The numbers are clear for developing Asia. Go back to the Asian financial crisis in 1997-98. Exports were about 36% of pan regional gross domestic product (GDP) in 2007. Just before the world fell apart that number was 47%. So the region has increased its reliance on external demand significantly. The bulk of the finished goods to come of this region do go to the developed world which is still in a rare synchronized recession. This will be a challenge for Asia moving into the second half of this year and looking well into 2010.
  
  Q: Where does this leave commodities and the commodity cycle? If your view is that we won’t get a very solid recovery from hereon, economically speaking, what does it mean for the commodity complex you reckon?
  
  A: I don't think we are in a depression. We are through the worst of the global downturn, although the recovery is going to be limited. I think the deflation call for commodity prices is largely behind us. We could see some normal ups and downs. These are obviously sensitive prices that trade both ways and have done so for a long time, but I don't see a pronounced downturn in commodity prices like we saw in the immediate aftermath of last crisis.
  
  Q: Give us your thoughts on what has been happening with China as a market because a lot depends on that by way of demand and where the market moves from here?
  
  A: The Chinese consumer is one of the big question marks in the global outlook. You are right to raise that as an issue. The Chinese want us to believe that they provide a lot of stimulus for internal private consumption. But if you look carefully at this four trillion Renminbi (RMB) stimulus package that was enacted last November, over 70% of it went to infrastructure and earthquake reconstruction, very little of it went to the Chinese consumer.
  
  Yes, they had a healthcare insurance bill that went through and expanded nationwide medical coverage. If you do the math, it works out to about USD 30 per year over the next three years for each Chinese citizen. So, it is not exactly giving consumers the confidence that they have a much of a safety net which will enable them to draw down excess levels of savings and starts stepping up as spenders. Same is true with social securities, pensions, unemployment insurance. Chinese families save because they are scared of future and current income prospects. Until they overcome those fears, I think the Chinese consumer is going to be missing in action.

Link to the video clip: http://www.cnbc.com/id/15840232?video=1167820563&play=1

Everyone's talking about China.

Professor Pettis latest piece rather interesting. Look at the size of the loan growth posted in his latest posting, China’s loan growth isn’t boosting my confidence in China’s “green shoots”

• Credible rumors suggest that new loans in June will hit RMB 1.2 trillion or more, as banks rush to inflate their quarterly loan numbers, just as they did in March, on the assumption that any cap in quarterly loan growth will be based on the previous quarter’s numbers. I would argue that new lending in 2009, running at 2 to 3 times the new lending over the same period in 2008, is not at all normal and is very unlikely to be healthy.

See also The China Accident Waiting To Happen To Every One Of Us, Would China Have A Debt Problem? and Andy Xie Calls It Speculative Inventory And NOT Commodity Stockpiling!

And John Mauldin features David Galland's summary of the June's Casey Report which features an interview with Neil Howe. Author of the book, The Fourth Turning. John Mauldin's outside the box is called A 20-Year Bear Market?. The following passages caught my attention.

• You don't need me to tell you that the United States and in fact the world are now facing a plethora of intractable problems. The world's former powerhouse economy, the U.S., is now the world's largest debtor nation – and by a wide margin. The nation has trillions in unpayable liabilities coming due on Social Security and Medicare, to name just two of many broken government programs weighing on the country. And our much vaunted democracy is increasingly dysfunctional – rotten to the core, truth be known – thanks largely to entrenched special interests and a voting public clamoring for their own piece of the pie, while trying to hand the bill off to somebody else.
  
  Meanwhile, the economy – despite rigorous jawboning by the government and its many friends in the large banking institutions -- is in serious trouble, with the housing market buffeted by tsunami-like waves of defaults, foreclosures, overvaluations, historic levels of personal debt, and tight credit that has left the U.S. government as the sole lender in many markets.
  
  Bernanke and his ilk may see green shoots, but what they're really seeing is the deep, green sea rising up once again to bury the economy.
  
  That's the bad news...........

• Most importantly, if Howe is right, this crisis is far from over. In fact, when I asked him where we are today on a scale from 1 to 10 -- with 10 representing as bad as the crisis will get -- he replied that we are at either 2 or 3. In other words, the worst is very much yet to come. And, per above, he expects this period of turmoil to take 20 years to play out. Thus, if nothing else, you may want to continue approaching matters of personal finance cautiously.

Different Spins Made On Dr. Stephen Roach's Speach!

Yesterday evening, I posted the following, Asia Countries Are Followers

• KUALA LUMPUR (Dow Jones)--The $827-billion stimulus package making its way through the U.S. Congress may not be large enough to substantially help the U.S. economy this year, Morgan Stanley Asia Chairman Stephen Roach said on the sidelines of a central bankers conference Tuesday.
  
  "This will not have a dramatic impact this year," he said, adding that the Obama administration may need to introduce another package at a later time.
  
  Roach also said Asian economies will likely remain in the doldrums for some time, as most are still export-led economies.
  
  "Asian countries tend to be followers, not leaders, so any recovery will depend on the recovery of the developed nations," he said.
  
  Roach also said the only possibility for an Asia-led recovery would originate in China, if the high savings rate of nearly 50% of gross domestic product translates into more consumer demand.
  
  He said the earliest Asia could see a recovery would be in the second half of 2009.
  
  Despite the fact that the crisis began in the U.S., Roach said the U.S. dollar's role as the international reserve currency "will stay for longer than people expect."
  
  He said that perhaps in 20 to 30 years, other currencies like the euro or the Chinese yuan will gain in importance.
  
  Asian central banks will continue to buy U.S. Treasurys, he said, and there won't be any aggressive selling.
  
  "Given the export-led growth structure in Asia, it's natural for them to continue to recycle a disproportionate share of their reserves into U.S. treasurys."

Here is the screen shot of that dow jones newswire.

Today Business Times carried the same report. However it chooses to focus on 5 words. China may lead Asean recovery.

Morgan Stanley: China may lead Asian recovery

Nice.

Here is the screenshot.

• CHINA may be the first Asian economy to recover from the global financial crisis, due to its high savings which can be recycled into the country’s infrastructure investment, says Morgan Stanley Asia chairman Dr Stephen S. Roach.
  
  He said recovery could begin as early as the second half of this year, supported by China’s large infrastructure spending.
  
  Speaking to the press at the end of the first day of Bank Negara Malaysia’s High Level Conference 2009 in Kuala Lumpur yesterday, Roach said he estimated the Asian economies to grow by not more than 2.5 per cent in 2009.
  
  “Even this is, to me, too optimistic when compared to the rest of the world at minus one and one-and-half per cent, especially it (Asia) being an export dependent region.”
  
  He said most of Asian export markets are in recession now, and unless Asia can come up with new sources of growth immediately, the export-led growth impetus will create a major economic activity shortfall.
  
  There is no quick fix to the current situation, Roach said, but Asian countries should stimulate internal private consumption.
  
  He expects the appetite for US treasuries by the Asian economies, particularly China and Japan, to continue in 2009.
  
  “There is a natural bid for treasuries whether they liked it not.
  
  Until China and the rest of Asia diversify their macro structure away from export towards internal private consumption, they are stuck (with US treasuries),” he said.
  
  Asked if the US dollar will continue its role as the reserves currency, Roach said the greenback will continue to dominate a lot longer than what most expected.
  
  “But I suspect over the next 20 to 30 years other currencies will have increased their role as reserves… maybe euro or renminbi assuming that the currency is convertible.”

And here is Star Business version. Morgan Stanley chief: Asia will be less affected by crisis

• Wednesday February 11, 2009
  Morgan Stanley chief: Asia will be less affected by crisis
  
  KUALA LUMPUR: Asia will have a less acute impact from the global financial and economic crisis but their recovery will also be slower than Western countries, said Morgan Stanley (Asia) chairman Dr Stephen Roach.
  
  He said Asia’s economies, which were largely export-led, would only recover after their main export markets, the US and Europe, recovered.
  
  “Export-led regions are followers, not leaders,” he said. “The only possibility (to recover earlier) is China, as it has large infrastructure spending in place that could provide support for economic growth.”
  
  Roach has predicted that China will recover by the second half of this year.
  
  He said Asia would grow below market projections this year, forecasting Asian growth at less than 2.5% and the rest of the world at between -1% and 1.5%.
  
  Asked if China could turn its high savings into consumption, he said unless China extended its safety net for employment and social security, consumption in China would remain deficient.
  
  Roach also said he doubted that the use of monetary policy to boost the economy could be as effective as before.
  
  “One of the consequences of lowering interest rates is high inflation. But my utmost concern is what the exit strategy for this aggressive easing is? How do you wind down without tipping to deflation,” he said, citing the example of Japan, where the economy had not been stimulated even with near zero interest rates.
  
  Roach said he preferred fiscal policies, especially those which focused more on investments rather than private consumption, as he felt businesses were better credit managers than individuals.
  
  On the US financial crisis, Roach said he blamed it on the reckless consumption, politicians and the central bank.
  
  He said the US was only 20% through its deleveraging cycle and that the adjustments being made would take a number of years to complete.
  
  On the US dollar, Roach said the greenback would continue as the world currency for a lot longer than many people thought, probably for a further 20 to 30 years.

How?

Do you see what I see?

LOL!

*whistle*

Asia Countries Are Followers

The following comments were posted on Dow Jones Newswire.

• KUALA LUMPUR (Dow Jones)--The $827-billion stimulus package making its way through the U.S. Congress may not be large enough to substantially help the U.S. economy this year, Morgan Stanley Asia Chairman Stephen Roach said on the sidelines of a central bankers conference Tuesday.
  
  "This will not have a dramatic impact this year," he said, adding that the Obama administration may need to introduce another package at a later time.
  
  Roach also said Asian economies will likely remain in the doldrums for some time, as most are still export-led economies.
  
  "Asian countries tend to be followers, not leaders, so any recovery will depend on the recovery of the developed nations," he said.
  
  Roach also said the only possibility for an Asia-led recovery would originate in China, if the high savings rate of nearly 50% of gross domestic product translates into more consumer demand.
  
  He said the earliest Asia could see a recovery would be in the second half of 2009.
  
  Despite the fact that the crisis began in the U.S., Roach said the U.S. dollar's role as the international reserve currency "will stay for longer than people expect."
  
  He said that perhaps in 20 to 30 years, other currencies like the euro or the Chinese yuan will gain in importance.
  
  Asian central banks will continue to buy U.S. Treasurys, he said, and there won't be any aggressive selling.
  
  "Given the export-led growth structure in Asia, it's natural for them to continue to recycle a disproportionate share of their reserves into U.S. treasurys."
  

Roach: Asia Decouple? Don't Kid Yourself!

Read the following on Dow Jones Newswire.

• DAVOS, Switzerland (Dow Jones)--The once-popular assumption that Asian economies can "decouple" themselves from any slowdown in their Western counterparts has proven "completely wrong" amid the current financial crisis, said Stephen Roach, chairman of Asia at Morgan Stanley, on Friday.
  
  "This time a year ago at this place there was consensus that we were embracing the so-called Asian Century and no matter what happens in the developed economies, Asia would decouple from it," Roach said at the World Economic Forum.
  
  "There's no decoupling in a globalized world. Don't kid yourself," he said, adding that the global slowdown has shown that "no region is more externally dependent than Asia."
  
  While China and India are suffering from a sharp weakening in economic growth, Japan is in a "horrific" recession, Roach said.
  
  The crisis is a "wake-up call" for those subscribing to illusory optimism and poses a big challenge for Asia to shift its growth model to a less export-dependent one, he said.
  
  "While the world trade boom has already gone bust, it won't be easy for Asia to boost private consumption," Roach said.
  
  At the same time, Roach said free trade remains the way forward for global economic growth and the long-stalled Doha Round of trade talks needs to be revived as soon as possible.
  
  He added that there tends to be "cyclical economic nationalism" during an economic crisis and political leaders around the world should prevent such harmful sentiments from getting out of control.
  

Asia Decoupling?

My Dearest Moo Moo Cow,

This issue is extremely interesting. Can Asia decouple itself from the US??? Can?

Here is a good posting on this issue from Morgan Stanley's Stephen Roach : Asian Decoupling Unlikely

• In recent weeks, I have met with senior policy makers in both China and India. It is clear to me that in both cases the authorities are in the process of shifting their policy arsenals toward meaningful restraint. In China, the direction comes from the top in the form of growing concerns expressed by Premier Wen Jiabao about a Chinese economy that he has explicitly characterized as “unstable, unbalanced, uncoordinated, and unsustainable” (see my 19 March dispatch of the same name). Since those words were first uttered at the end of the National People’s Congress on 15 March, Chinese authorities have been quick to respond. There was a monetary tightening the very next day and the securities industry regulators have issued new rules that prevent companies from purchasing equities with proceeds from share sales. The former move is aimed at cooling off an overheated investment sector while the latter move is addressed at dealing with a frothy domestic stock market that increased by 100% in the six months ending in late February. I am more convinced than ever that Beijing is now deadly serious in attempting to regain control over its rapidly growing economy in an effort to shift the focus from the quantity to the quality of growth. This is good news for China but could be disappointing for the decoupling camp that expects rapid Chinese economic growth to remain resistant to any downside pressures.
  
  India is similarly positioned. The Reserve Bank of India does not take overheating and cyclical inflationary pressures lightly. I was actually in Mumbai the day the RBI tightened monetary policy last month (13 February), and it was clear to me in my discussions at the central bank that it meant business. The RBI’s official statement following that action said it all: “(A) determined and co-ordinated effort by all to contain inflation without unduly impacting the growth momentum is not only an economic necessity but also a moral compulsion.” Our Indian economics team underscores the risk of another monetary tightening prior to the 24 April policy meeting. At the same time, the government’s annual budget contained measures that would cut tariffs on food and other price-sensitive manufactured products. Indian authorities are fixated on a mounting cyclical inflation problem and appear more than willing to take a haircut on economic growth to achieve such an objective. Our current economic forecast reflects just such an outcome – a downshift to 6.9% GDP growth in 2008 following average gains of 8.7% over the 2005-07 period.
  
  There is a second factor at work that is also likely to challenge the view that hyper growth is here to stay in Asia – the region’s persistent reliance on external demand as a major driver of economic growth. This is less a story for India, with its relatively small trade sector, and more a story for the rest of Asia. China is at the top of the external vulnerability chain. Its export sector, which rose to nearly 37% of GDP in 2006, surged at a 41% y-o-y rate in the first two months of 2007. Moreover – and this is an absolutely critical point in the decoupling debate – the United States is China’s largest export market, accounting for 21% of RMB-based exports. As the US economy now slows, the biggest piece of China’s export dynamic is at risk. So, too, are the large external sectors of China’s pan-Asian supply chain – especially Taiwan, Korea, and even Japan. Lacking in self-sustaining support from private consumption, the Asian growth dynamic remains highly vulnerable to an external shock. That’s yet another important reason to be very suspicious of the case for global decoupling.
  
  Decoupling and global rebalancing go hand in hand. A decoupled world is very much a rebalanced world – and vice versa. Recent trends admittedly lend some support to the decoupling thesis – especially a booming Asia economy but also a seemingly remarkable cyclical revival in Europe. The European upsurge is a welcome development, but perspective is key. At most, it will add 0.2 to 0.3 percentage point to our baseline case for world economic growth. Asia, especially China and India, is a very different story. This is a much larger segment of the global economy and is growing at rates that are three times as fast as those in the developed world. An Asian economy that only barely widens its growth multiple relative to the rest of the world could well drive global decoupling on its own.
  
  That’s unlikely to be the case, in my view. Not only does Asia remain vulnerable to a US-centric external shock, but the region’s two most powerful growth stories – China and India – are now both very focused on matters of internal sustainability. The Premier of China has put his reputation on the line in attempting to bring an unstable, unbalanced, uncoordinated, and unsustainable Chinese economy under control. The Indian government is equally focused on an anti-inflationary policy tightening. Looking backward, both of these economies have been on an exceptionally strong growth path that – if left to its own devices – could play an increasingly important role in powering a decoupled world. Looking forward, however, it’s likely to be a very different story. With growth prospects in China and India tipping to the downside at the same time the US economy is slowing, the global economy is likely to be a good deal weaker than the decoupling crowd would lead you to believe.
  
  

The Four U.

Morgan Stanley's Stephen Roach latest editorial: Unstable, Unbalanced, Uncoordinated, and Unsustainable