COMMENT As US sinks, Asia
unable to swim By Walter T
Molano
The US economy is down by the bow,
and the prognosis does not look good. The final
outcome is inevitable, and no one (outside the
United States) is really surprised. However, how
does Asia avoid contagion?
At the current
moment, the US represents almost half of global
demand - which is disproportionate with its
percentage of the global population. Unwilling and
unable to help itself, the US is
beyond repair. Asia tried to
help out as much as it could, mainly by providing
ample financing. However, Asia now has to live
with the grim realities that lie ahead.
From a non-Asian perspective, this is a
perfect opportunity for the region to catapult
ahead. Young, well educated and vibrant, Asia is
poised to take the poll position of the global
economy. The easiest way to do so would be for
China to allow full convertibility of its
currency, the yuan. With the stroke of a pen, the
US dollar would collapse and the United States
would become completely irrelevant.
At the
same time, China, along with most of Asia, would
become the dominant sources of global demand.
Unfortunately, there is reluctance in Asia to
assume the global leadership position.
At
first glance, full yuan convertibility would be a
win-win combination for China and the world. The
massive appreciation of the currency would
increase the purchasing power of hundreds of
millions of Chinese consumers, along with many
millions more in the surrounding countries. The
Chinese economy would absorb much of the slack
created by the deceleration in the US.
It
would also result in a dollar-denominated surge in
commodity prices. Such a move would have an
inflationary effect, since the dollar price of
Chinese exports would also rise. Nevertheless, a
steady-state equilibrium would soon be established
as currencies around the world readjusted
themselves to the yuan peg. The improved
purchasing power of the Chinese consumer would
allow the proliferation of services, producing
employment opportunities for displaced workers.
Of course, such a move would have a
devastating effect on the value of China's
international reserves - since they are mostly
US-dollar-denominated. Yet this would be a small
cost to bear for the accelerated development China
enjoyed during the past 15 years. Although this
scenario should be appealing, it is considered to
be a political anathema.
This is where
China's political and economic systems conflict.
Although the Chinese Communist Party (CCP)
countenanced the nation's move to a market-based
system, the two were inherently conflicted. Market
systems are established on flexibility and choice,
which is the reason they are accompanied by
democratic political regimes. Communist systems
are built on political control and direction. The
party decides what is produced, and how it is
done. It decides the allocation process.
The move to a market-based economic system
eroded the CCP's political base, but it retained
one essential element of control - the flow of
capital. Through the use of capital controls, the
party retained influence and an overriding veto
over all economic activity. Therefore, full
convertibility would result in the party's
irrelevance and eventual demise.
To a
lesser extent, this view is shared across the
semi-authoritarian regimes of Southeast Asia, such
as Malaysia, Thailand, Indonesia and Vietnam,
where the use of capital controls is akin to
political power. Therefore, what will Asia do to
limit the fallout from the US debacle?
Asia knows that it has to boost its level
of domestic demand to offset the calamity that is
unfurling across the Pacific. Although Asian
economies are muscular and fit, sporting large
current-account surpluses, hefty international
reserves and low levels of debt, they are still
dependent on external sources of demand to
off-take their domestic production. A downturn in
global demand would soon result in slower economic
growth and higher unemployment.
Nevertheless, full convertibility is not
in the cards. Therefore, Asia will suffer from the
US malaise. There are signs that the central banks
will allow a faster appreciation of the regional
currencies against the dollar. These measures will
help commodity prices and alleviate some of the
global slowdown. But they are not enough, and they
still leave the region vulnerable to a cataclysmic
event on the other side of the Pacific.
(Copyright 2007 Walter T Molano, The
Emerging Market Adviser.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
