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China freezes, Asia catches
cold
By Alan Boyd
SYDNEY -
Corrosive oil prices, faltering US demand and investment
curbs in China are starting to show up in economic data,
forcing lower quarterly growth throughout Asia and
confronting monetary chiefs with some awkward questions
on interest rates.
Of these three interlinked
challenges, the Chinese crackdown is the one causing
most uncertainty among central banks as the region's
economic powerhouse enters largely unchartered territory
following a decade of vigorous expansion. A progressive
monetary tightening, targeted especially at the
overheated construction and real estate sectors, has had
a dampening effect on urban fixed investment, according
to the National Bureau of Statistics in Beijing, with
October data showing a 15.3% decline since the first
quarter. Investment growth in the steel and cement
industries dropped by 65.5 and 43.4 percentage points
respectively, while real estate investment fell by 12.8
percentage points.
Chinese export orders have
also started to ease as higher oil prices erode
consumption in key Western and Asian markets, triggering
factory cutbacks. Industrial output in August grew by
0.4% from September and was 1.2% down on the same period
in 2003.
Imports will be the next to level off
after China's decision to boost interest rates, for the
first time in nine years. Consumer goods and
manufacturing equipment, which comprise two of the
biggest shipment segments for other Asian states, will
take a big hit. Much of Asia will rely more heavily on
export revenues as domestic consumption begins to taper
off in response to higher oil prices. Although the cost
spiral has ended in global markets, it will be months
before inflationary pressures subside and consumer
markets recover.
In India, the Finance Ministry
has reduced the official growth forecast to a range of
6-6.5%, down from 7%, because of the surge in crude
prices and an unsettled monsoon season. About 65% of
India's crude oil is imported. Gross domestic product
(GDP) grew by 7.4% in the first quarter but has since
fallen. Wholesale prices soared to 8.74% in August, the
highest level since the middle of 2001, and further
increases are likely following a fuel price hike by
state oil marketing companies in early November.
Japan, almost totally dependent on imported
fuel, reported growth of just 0.1% between July and
September, prompting a downgrade by the central bank and
casting further doubt on its much-trumpeted recovery
from years of stagnation. Export earnings are weakening
as regional demand wanes and Japanese competitiveness is
undermined by the yen's steady appreciation against the
dollar. Many of Asia's currencies are either fixed to or
loosely aligned with the greenback.
South
Korea's economy expanded by a slower rate of 4.6%
year-on-year in the third quarter, down from 5.5% in the
previous three months, with the government blaming weak
consumer spending and lower export revenues resulting
from the oil spiral. On a seasonally adjusted basis, GDP
rose by a mere 0.6%, the smallest increase for 12
months. Much of the lost export income can be attributed
to a 12% appreciation of the South Korean won since the
start of the year.
Singapore, another net oil
importer, recorded a sharp slowdown in the third quarter
and immediately cut its growth forecast for the entire
year to a range of 8.0-8.5%, a reduction of 0.5%.
According to the Trade and Industry Ministry, GDP rose
by 7.5% year-on-year between July and September,
compared with 12.5% in the second quarter. On an
annualized basis, growth dropped by 3%, though the
economy still expanded by 9.1% in the first nine months
because of a low base in 2003.
Elsewhere, crude
exporters Indonesia and Malaysia have warned of weaker
export demand despite higher oil receipts, and growth
forecasts have been lowered in Thailand and the
Philippines. Pakistan reported a 10.4% drop in dollar
export earnings during October compared with September.
Chances of import demand from China and the
United States recovering before the second half of 2005
are slim as the macroeconomic response to China's
widening current account surpluses - already a source of
considerable diplomatic tension with Washington - will
reverberate through the region. While Beijing can be
expected to loosen the yuan's ties with the dollar and
allow its exports to appreciate slightly against
shipments from other low-cost Asian producers, the US
Federal Reserve has signaled its intention to maintain a
weak exchange policy. In any case, there is a likelihood
that the dollar will be depressed by a pullout of
Japanese capital as that country's growth declines.
At the same time, China's domestic-policy
response will make its own market less accessible. The
central bank has indicated it will continue to take the
heat out of bank lending growth, especially for consumer
imports, most probably through a series of small
interest-rate increases.
For monetary chiefs
elsewhere in Asia, the dilemma is how to keep their
currencies competitive in the face of these constraints
without overreacting to the inflation threat and choking
off what remains of domestic demand. Although there is
an established tradition of intervening in exchange
markets to prevent appreciation, big oil importers such
as Japan, South Korea, Thailand, Singapore and the
Philippines need strong domestic currencies so they can
fill their energy quotas.
As a possible
reflection of this paradox, interest-rate policies have
followed an erratic path, though only a handful of
countries are likely to resist the global pull toward
monetary tightening once the impact from oil prices
becomes less pronounced. The most likely formula is a
mix of fiscal and monetary measures that can prick the
inflationary bubble without hurting core growth
prospects. But so far, there has been little policy
consistency.
India has slashed import duties on
petroleum, steel and edible-oil products but raised two
key lending rates, including the repurchase rate charged
to banks, to help absorb excess consumer credit.
Thailand has twice raised prime lending rates since
September while tightening access to consumer credit,
enforcing prudential banking regulations more closely
and cooling the rampant real-estate sector. Taiwan has
also lifted interest rates.
However, South
Korea's central bank went in the opposite direction,
reducing taxes and offering cheap refinancing to
debtors, but simultaneously lowering its benchmark
interest rate to a record low for the second time in
three months. They may all have gotten it wrong: warning
against an overreaction, the International Monetary Fund
has suggested the central banks bide their time until
the growth trend becomes more apparent.
But that
might not be until well into the first quarter of next
year, leaving little time for monetary chiefs to respond
if it all goes wrong. In the meantime, they might be
better off looking to Beijing for guidance on where the
regional economy is heading.
(Copyright 2004
Asia Times Online Ltd. All rights reserved. Please
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