Is there a 'failure' in Asia's economic engine?

The US "Wall Street Journal" recently published an article saying that China's second-quarter economic data showed that its growth rate slowed down, which is actually only one aspect of the overall economic trend in Asia. After the stratospheric growth of the past few years, Asia's economic growth engine is beginning to "fail".

After a recovery from the second half of 2012 to early 2013, the export momentum of emerging Asian economies has slowed. The dominant market that determines the export trend of emerging Asian economies in recent years is the emerging market, whose trend conceals the impact of cyclical fluctuations in the US, Europe and Japan markets. In terms of recent trends in major markets for Asian emerging economies' exports, in the first quarter of 2013, the United States and the European Union performed better, while emerging markets and Japan were sluggish. This divergence is due to the recent rotational pattern of global economic activity, with advanced economies picking up speed and emerging markets slowing down. The exception is Japan, where the impact of stronger domestic demand has not yet been reflected in the export data from emerging Asian markets. In view of the further intensification of the divergence of global economic growth, it is expected that the export trend of emerging Asian economies to the United States and Europe will be better than that of the export trend to emerging markets.

Vulnerabilities vary from country to country in the region. Commodity exporters such as Australia and Indonesia, for example, are most affected by falling demand for iron ore and coal in China. In contrast, commodity importers such as India, the Philippines, South Korea and Thailand have benefited from lower prices from lower demand from China, which is especially important given that the recent currency depreciation has made it more expensive to buy items from abroad.

India is less affected by China's economic cooling because it Compared with Asian countries, India is the least dependent on exports. However, the country is one of the few in the region to have a current account deficit, meaning it imports more goods, services and revenue than it exports. In addition, India needs foreign capital to meet domestic spending. Slow progress on reforms and elections next year have also weighed on investor confidence, sending the rupee sharply depreciated over the past two years.

A pickup in growth in Japan may help offset some of the cooling effect of China's economy. Shinzo Abe's government is trying to revive Japan's economy, which has been weakening for decades.

Stocks in most Asian markets were sluggish. Top market indices in Indonesia, the Philippines and Thailand are down about 9% since mid-May. Currencies such as the Malaysian ringgit, the Philippine peso and the Thai baht were all down about 5 percent against the dollar. In Indonesia, the rupiah fell to 10,000 rupiah to the dollar earlier this month for the first time since September 2009.

In India, the Indian rupee is hovering at an all-time low against the dollar, prompting the central bank this month to announce a slew of measures to stem the slide. Indonesia and Thailand recently lowered their economic growth forecasts for 2013.

The combination of declining dynamism in China, a fragile European economy and less easy credit from China and the United States has dimmed the once hopeful outlook for the rest of Asia. The latest evidence of China's economic weakness came in a survey last Wednesday.

7China's manufacturing sector contracted at its fastest pace since last summer in July, the survey showed. The survey, compiled by research firm Markit and published by British bank HSBC, came in at 47.7 for the month, down from 48.2 in June.

The key issue in Asia is China. After China's interbank offered rate rose to 13% in June, investors began to worry about a period of credit crunch. The prevailing view among senior Chinese economic watchers is that pressure on the banking system is the first step in China's new leadership's attempt to put the economy on a long-term sound track. Other measures will also include draconian measures to control corruption. But even optimistic analysts agree that changes will be gradual.

The British "Financial Times" article on July 26 believes that China's economic slowdown and structural adjustment may have an impact on some aspects, but its impact should not be exaggerated. Even with China's economy growing at an annual rate of 7.5%, it still contributes more to expanding global demand than any other country. The reason people are disappointed with the 7.5% growth rate is because the economy is China and people are used to relying on its 10% growth rate.

On the other hand, in the face of China's economic rebalancing, some people are happy and some are sad. Commodity exporters such as Australia are currently nervous. But China's economic restructuring also has beneficiaries. As long as China succeeds in stimulating consumption and gradually expanding its services industry, companies that produce other products and services for Chinese consumption will benefit. The Financial Times commented that China's new leadership places more emphasis on deep reforms rather than short-term stimulus. There are indications that China's economic downturn has stabilized, with rapid growth in services and industry more than offsetting weak exports.

The biggest challenge facing China's new government is rebalancing the economy. To improve exports and build hard currency reserves, China has invested heavily in state-owned export-producing enterprises and infrastructure. In 1999, consumption accounted for 46% of GDP. By 2010, this proportion had dropped to 35%, while investment accounted for 45%. The five-year plan, launched in September 2010, set a goal of bringing consumers back 45 percent and reducing investment spending, but little progress has been made.

In China, the government is trying to ensure a soft landing for the economy. It is also logical that the Chinese government pushes for deepening economic reforms rather than economic stimulus. The central bank's recent move to tighten short-term funding for banks is also part of a transition phase aimed at removing excess liquidity from the economy.

China's leverage is the most worrying issue in Asia. Fortunately, the Chinese government has begun to address this problem by slowing growth and curbing the flow of credit to overcapacity industries. If there is a serious problem with the economy, problem loans could surface and some banks may have to recapitalize.

Except for China's corporate sector, widespread high leverage in all sectors of the Korean economy is also an issue and continues to weigh on Korean growth. Some long-term positive factors will also be able to help restore balance to the global economy. Household leverage remains low in most countries in Asia, especially China, India and Indonesia, with potential upside.

At the same time, in most countries and regions in Asia, government and household balance sheets remain healthy and economic growth remains high, providing sufficient flexibility to deal with the inevitable pains of economic cycle transition. Asian governments have learned the lessons of the 1997-1998 Asian financial crisis and have been adopting macroprudential policies. Hong Kong and Singapore are prime examples of using these measures to limit the rise in property prices. Several Asian economies still have room to realize their full growth potential through increased lending.

The optimists therefore argue that the current turmoil in emerging markets should be a blip for Asia. Not only does it provide a timely opportunity to clean up some of the Asian countries' non-performing assets and liabilities, but it also lays the groundwork for more sustained and sustainable growth in the next phase. A recovery in the U.S. and Japan, which has triggered the latest round of self-reflection, should be seen as another positive for emerging markets and the global economy. A gradual recovery in U.S. demand will help Asia out of the slump and spur growth through robust exports.

However, the dissenting argument also believes that this is unlikely to happen, and Asia may have to deal with it alone if it wants to get out of the dilemma of slow economic growth, because the benefits brought by the strengthening of the US economy to Asia will not be as good as in the past.

First, an improvement in the U.S. economy might spur imports from Asia, but it could also trigger other policy responses that are not necessarily good for Asia. The Fed's accommodative policies have triggered a flood of liquidity into Asia, pushing interest rates to historic lows, and Asia's growth in recent years has been largely driven by the resulting debt leverage. An exit from the Fed's easy monetary policy will lead to a stronger dollar and higher U.S. interest rates, which will hurt Asia more than ever.

Second, and equally important, the increased demand in the United States will not be the usual boom for Asian exporters. For Asian economies, exporting goods across the Pacific is less important than it used to be. Moreover, U.S. manufacturing has regained an edge over its Asian competitors. At the same time, as Asia struggles to provide adequate energy supplies, the United States has continued to reduce energy costs through the shale gas revolution, giving American companies another advantage.

The Wall Street Journal notes that only major reforms can save Asia. It must wean itself off its debt addiction to mitigate the impact of rising financing costs. While deleveraging, it must also increase productivity. Among them, energy will be the top priority. The lack of competitive natural resources in much of Asia reinforces the urgency for reform. This time, Asia cannot count on a gradually recovering US to help it out.