Decoupling – Just in Time

May 21, 2010

Is it only me that is puzzled? Asia’s economies are supposed to be heavily dependent on the export markets of Europe and the United States – that’s what the old argument about decoupling is all about. So how is it that as debts mount in Europe and the US, with government spending being cut, taxes raised, consumers cutting back, and unemployment still moving in the wrong direction that Asia’s economies continue to bound forward?

I suppose the simplest – and most plausible – answer is that the impact of contraction in Europe and the US has yet to hit us. After all, the US Government’s various stimulus initiatives have yet to expire, and so may still be buoying the consumer market. A group of US department store chains including Macy’s and JC Penny, accounting for about 3,000 stores and annual sales of about US$70 billion, said last week that sales in the early part of this year were tentatively up from the gloom of spring 2009.

And in Europe, while the horrors of the past two weeks have revealed at least seven EU economies as close to bankrupt, the austerity measures needed to pull these economies back from the brink have yet to be put in place. Spain, for example, is cutting government salaries by 20%, raising taxes and cutting services – but it may take many months before the consumer impact of these austerity measures feed back to Asia’s exporters. Britain’s fragile coalition Government has admitted the need for massive cuts in services, and tax increases, with economists talking of a need to save more than US$70 billion a year, but no axe has yet been swung, so consumers continue to spend, buoyed b y record-low bank and mortgage interest rates. It seems the tsunami wave is still out at sea, and approaching at uncertain speed. In the meanwhile, consumers continue to spend, and Asia’s exporters continue to do what they know best.

But this answer is not wholly convincing. Western consumers must surely be feeling some of the effects of the global recession, and making cuts accordingly. This is also reflected in some recent data. If you look at where Asia’s exports are going to, a significant shift appears to be underway. In 2007, 37.5% of Japan’s exports went to Europe or the US. In the first quarter of this year, these two traditional locomotives of the global economy accounted for less than 29% - a fall of almost 9 percentage points. At the same time, Asia’s markets today account for 59% of Japan’s exports – up from 52% in 2007.

By the same measure, China’s exports to Europe and the US accounted in the first quarter of this year to 38% of total exports – down from 45% in 2007. Economies like Hong Kong, Taiwan and Singapore have also become steadily more dependent on sales within Asia: 70% of Taiwan’s and Hong Kong’s exports now stay in Asia, compared to around 65% three years ago, while Asia today accounts for over 73% of Singapore’s exports – up from 70% in 2007.

And while China still has a long way to grow before it can provide the locomotive power that the colossal US market can provide, changes here appear to have been extremely important in keeping Asia buoyant. Of course, China’s RMB 4 trillion stimulus package has played its part, but there appear to be more sustainable forces at work.
Chinese consumer spending is indeed growing strongly in response to a lot of Government prodding. Data shows that sales of social consumer goods have risen from 34% of GDP in 2007 to 38% last year – still below the 40% level prevailing around 2000, but clearly moving in a stimulative direction.

Perhaps more important than the consumer, however, is the Government’s ambitious nationwide infrastructure-building programmes, and the colossal city-building process being undertaken to cope with the steady shift of people from rural to urban areas. The scale of these programmes is truly awesome.

Behind the headline that China plans to build 100 cities of 1 million people or more in the coming decade lies not only the construction of millions of homes, but of hundreds of millions of home fittings, from shower units and air conditioners and water heaters to sofas and bedside tables.

Infrastructure-building is even more awesome in its scale and ambition. Not only 13,000 kms of high speed railway, and similar thousands of miles of super-highway, but about 100 new airports, to be served by thousands more aircraft (some of them undoubtedly the home-grown C919 now being developed in Shanghai). Not only hundreds of new domestic gas-supply systems (many being developed in joint venture by Hong Kong & China Gas) but at least 25 new city metro systems. Not only the world’s most ambitious programme of developing wind and solar power, but also the production-line manufacture of nuclear generators – all intended to dilute the country’s reliance on coal-fired power.

Put these programmes together with those plans being developed to improve health care, education, and other social welfare measures, and you have many more trillions of investment planned for the decade ahead, stretching far beyond the current stimulus package and making China look much more like a globally significant locomotive economy – even today.

To me, this kind of locomotive stimulus is much more acceptable than knee-jerk acceptance of western pressure to boost household consumption. After all, it was the west’s hyper-consumptive habits that have bulged over the past two decades that sit at the heart not only of the 2007 global clash, but also of the unsustainable strain on so many of the world’s finite resources.

We must be realistic and recognize that some time quite soon, the enforced austerities being put in place in Europe and the US will undoubtedly hurt our export economies, but there seems to be evidence that Asia’s economies – and China in particular – are beginning to provide enough puff to keep our region’s economies growing steadily even with Europe and the US in recession. Maybe we are seeing a bit of “decoupling” after all – just in time. 


* The translated Chinese version was published in Ming Pao on May 21, 2010.

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