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PARK Bun-Soon

China Offers Limited Hope to Asia

PARK Bun-Soon

Nov. 17, 2008

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The steady drumbeat of bleak economic news from the United States clearly signals an end to easy credit that had fueled unbridled private consumption in the country. The US economy will have to restructure. Americans will have to start living within their means. This will affect the level of imports from Korea and its Asian neighbors. Moreover, the appetite for US Treasury bonds is expected to decline. For years, East Asia n capital bought US bonds, which allowed US interest rates to remain low, and facilitate d the buying binge for Asian cars, electronics and other exports.

A look at industrial production in Asia indicates how the global credit crunch and global consumer cutbacks are affecting the real economy. Industrial production in newly industrialized economies (NIE) as well as Southeast Asian economies has slowed substantially since the second quarter this year. In particular, China's GDP growth rate decelerated to 9% in the third quarter, well below the forecast 9.7% and the slowest pace since the breakout of SARS in 2003.

Foreign investors, expecting far more fallout from the US financial crisis and its worldwide repercussions, have fled Asian markets. China's Shanghai composite index has declined the most, 60% since the beginning of the year, while Korea and Singapore's have dropped by around 50%. In the foreign exchange markets, the won has depreciated against the dollar by more than 25% since August. Meanwhile, credit default swap premiums have been pushed up to 500 basis points in Indonesia, Vietnam and the Philippines.

Fortunately, export s have helped cushion the turmoil. Exports from Korea, Japan, China and Taiwan have grown faster this year than in 2007. Southeast Asian countries, with the exception of the Philippines and Singapore, also have done better this year than in 2007.

China's imports have increased rapidly since 2000, foisting overall East Asian trade. East Asia accounted for 27.1% of global exports in 2007, up from 25.6% in 2003. Moreover, even though China's exports to the US have slowed since 2004, its imports from neighboring East Asian countries have continued to rise. This is due to the regional diversification of trade to the Chinese domestic market, which has reduced uncertainty among East Asian economies, that had indirectly relied on expanding US market share by producing and exporting from China. For Korea, China already has replaced the United States as the No. 1 export destination. Other Asian nations will likely see the same reshuffle if China maintains its high level of regional imports.

Nevertheless, it is premature to regard China as East Asia's life raft. Exports to China by East Asian countries have increased in quantity, but in qualitative terms they are less encouraging, being the main reason behind the slowing industrial production and economy of these East Asian countries: East Asian exports to China of electronics products with strong industrial linkages have fallen, whereas exports of products with low employment effects like oil refinery products have increased.

To be sure, the vertical intra-industry trade involving China has become deeply embedded ; Asian nations export parts and intermediate goods to China for assembly and the finished product is exported. The rising contraction of private spending, especially in Europe and the US, will thus hurt all Asian exporters.

Another point of consideration is that the global financial market crisis is offsetting the effect of the economic decoupling of East Asia with the United States. Globalization of finance has integrated the East Asian financial market. Due to inadequate monetary cooperation within East Asia, the region reinvests a considerable amount of its current account surplus in the US, ensuring that it also suffered when the US financial system began to buckle.

East Asian countries need to find their way out through the establishment of a systemic cooperation framework. Expansion of intra-regional trade in finished goods rather than intermediate goods and parts will likely help. Despite the increase of recent years, the share of intra-regional trade within East Asia is low compared to the European Union, which boasts a horizontal intra-industry trade structure rather than the vertical intra-industry trade system in East Asia.

Additionally, an East Asian free trade agreement will be very helpful for expanding the market for consumer goods and reducing dependence on exports to the United States. Finally, the Chiang Mai Initiative (CMI) to help Southeast Asia, Korea, Japan and China manage short-term liquidity problems should be transformed into an East Asian Monetary Fund to protect against foreign exch a nge crisis in the region over the long term.

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