The Decoupling Of US And Asian Market? Part 2

There are much debates and rhetoric about potential decoupling of the largest market in the word from Asian market. Many of the like discussions attempt to address concerns of the Asian markets would stand strong or escape with modest effect from the recession in US. Many of these doomsayers inappropriately painted the worst economic scenario in US and boasted the robustness of Asian market which could withstand the economic recession in US by their domestic demand and subsequently decouple from the world’s largest market.

The weak economic indicators reported in the press and the corporate meltdowns have been employed to justify their arguments. The 5% unemployment rate in December, slower than expected retail sales, Citigroup and Merill Lynch’s write down of bad loans, credit crunch and others, undeniably are indicators of potential recession, which some of the doomsayers say the recession could last until the next first or second quarters. During this downturn, many emerging countries would very likely to take over the role played by US as the largest buyer in the world. Obviously these countries are China and India, and some focuses on Eurozone as the appreciating Euros increases the purchasing power.

However, the decoupling scenario is rather far fetched, at least not in this near five to ten years. Asian market as a whole, which is now being engined and propelled by China could not possibly absorb the overall Asian’s supply. Since China was admitted to WTO and its role in world production network increases, many manufacturers have shifted their operation to China to reap on the advantage of low cost and other benefits that the country offers. Most of these companies are hardly indigenous; they are owned by Taiwanese, US, Europeans, and others. It is safe to say that China is a global factory, and many of the products produced are shipped to developed countries, such as US and Europe.

The relocation to China is seldom caused by the mass market. Places except Shanghai, Hong Kong, Shenzen, and other coastal provinces, are either undeveloped or outright neglected in the course of development. Thus, the overall purchasing power of the mass population is very low. The idea that China could replace US as largest market is impossible.

Robust economic growth of China in the past decade has created concern of potential price bubbles. The growth has increased the business sentiments and potential of the economy, which has caused the inventories to build up, increase of production, positive potential has helped to buoy the demand further and the whole economy boasted a more than 10% growth in the past decade. As the result, price of property has been artificially shot up by speculation and hot money, corruption has been wide spread. Recognizing the danger of business cycle and the looming bubble burst, policies have been drawn up to curb the over exposure of the economy; control of prices of essential goods, stricter environmental regulations to curb excessive production of manufacturers, more stringent export rules, higher quality assurance and inspection on exporting products, and higher reserves required in conventional banks. These steps are being taken amid financial crisis in the US market. Expectedly, the policies are to cool the economy in the next quarter or so, and the domestic demand dynamics which were witnessed in the past decades would be reduced tremendously.

At the other front, the overall Asian markets are gripped with potential high inflation rate. Singapore, Taiwan, Malaysia are seeing their purchasing power being eroded by edging price of crude oil. The depreciation of Greenbacks has caused the price of oil expensive in these economies. The notion that domestic demand could offset the demand evaporated due to US recession is therefore not so promising. Contrasting with the positive perceptions that the markets are undergoing structural shifts and become more robust, and thus could decouple from US market, the local Governments are now face with the potential inflation ( due to price surge in oil), and since US has been the largest export market, the potential of lower external demand is looming large. In other words, the local Governments are juggling with either increase the short term rate to combat the inflation or reduce to boost local demand to cushion the US recession. Either way, the economies in the region are very much exposed to the recession due to their long history of depending on US market.

This dependence can be seen in technology sector. High number of manufacturers in the region depends on tech spending in the US market. Since the mortgage crisis, the spending has proven to be very slow or outright negative. The crisis is not confined to mortgage market, its spread is seen in manufacturing, retail, and general business. The securitization of the sub prime loans, and coupled with the grading of these securities had supported the investments. The sudden drop due to the dry up of demand, and the revelations of so many unscrupulous practices in granting of loans and investment practices have caused one to question the integrity of grading of these investment tools. The lost in sentiment is further enhanced by the evaporating asset values, which its appreciation had fueled demand in the past decades. These have caused the cut down in expansion of businesses, lower demand in retails, and most importantly the cut down in tech spending which causes a large impact on import of the gadgets from Asian markets. Thus, the demand of the core sector of Asian economies is quickly running out.

The focus is now on two other developed nations to help cushion the impact; Europe and Japan. However, Japan has been experiencing economic slow down since early 1990s. Its short term rate has been low and has raised concern of potential high price in the economy. With the expected slower demand from US market, it has been tough for the economy to raise rate in the short term. The other factor relates to the concern of putting pressure on Greenback if Japan increases the short term rate. The effort could trigger higher re-purchase of Yen due to unwinding of carry trades, and put a downward pressure on dollars, thus aggravating the recession. European markets are facing high unemployment rate since relocation of manufacturers to low cost emerging markets such as Asia, and Eastern Europe. The recession and depreciation of dollar has caused huge damage to the businesses exposed to the US market but operating in Europe. Further, the idea that the continent could offset the demand drop and absorb the shocks is impossible.

In this gloomy environment, it is best that one does not predict any miracle could emerge that could absorb the goods that the region produces, or rather to debate on the possible decoupling of the markets. The most important lesson learnt from the past crisis was the evolution of new industrial structure, which is resulted from phasing out of obsolete and incompetent industries, businesses becoming more lean, and therefore, improvement of overall business environment.