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New debutante at
the ball: The Asian consumer
By Keith W Rabin
Many analysts evaluating the Chinese yuan
revaluation are focusing on the fact that a 2.1%
appreciation is unlikely to raise the relative
competitiveness of US manufactured goods. Others
question its impact on US consumer spending. The
subsequent "solemn declaration" by the People's
Bank of China (PBoC) that this change "does not
mean this adjustment ... is a first step ..." has
only reinforced this prevailing skepticism.
But this view misses the point.
Irrespective of any announcements by the PBoC -
which is obliged to cool down speculative
sentiment to prevent large inflows of hot capital
- it should be clear this marks a major step in a
long-term adjustment process. Former US
Undersecretary of the Treasury for International
Affairs, John Taylor, characterized it in a recent
Bloomberg radio interview as being similar in
importance to the US abandoning the Bretton Woods
system when gold backing was removed from the
dollar in 1971.
Even if one is relatively
bullish on the US, it is hard to dispute it is a
relatively mature and over-serviced economy.
Consumers are highly indebted - and most of the
easy gains from corporate rationalization have
been realized. There is far more upside growth
potential in developing economies. For example, it
has been estimated that only 5% of the Chinese
population has flown on a plane, and there are
less than 200 airports in China compared to more
than 10,000 in the US. Which market has the
greater potential for increases in aviation
services moving forward?
In India,
consumer finance leader ICICI bank issued about
100,000 new credit cards every month during 2004.
Total card usage in the country doubled from 4.3
to 9 million over the previous four years. One
might wonder if this is sustainable - until one
realizes India has a total population of 1.1
billion. Only 53 million - less than 5% - are
estimated to be mobile phone subscribers.
Indonesia's mobile telephone market is
also growing rapidly - at a greater than 70%
compounded annual growth rate over the last six
years - yet still has one of the lowest
penetration rates in the region. Similar and
perhaps even more extreme statistics can be found
for automobiles, appliances, mortgages, luxury
goods and most other consumption measures. Even
more mature markets such as Japan and Korea have
been showing signs of more robust consumption in
recent months.
The simple fact is the US
cannot indefinitely sustain dramatically higher
wage scales and cost structures than developing
countries without further enhancing its
competitive advantage. That will not be easy. One
recent McKinsey Global Institute report goes so
far as to predict that, in some industries, a
quarter to half of all jobs are likely to move
offshore from mature economies. Neither can the US
maintain its role as the primary engine of world
growth through a debt-financed consumer binge and
dramatic inflation of housing values. The
necessary correction may not be imminent, and
indeed many extremely bright investment managers
have underperformed in recent years as they try to
pick the top. Nevertheless, Paul Volcker, Julian
Robertson, Warren Buffet and Peter Peterson are
just a few of the many wise people who have gone
on record as fearing the potentially severe
consequences that may accompany the adjustment
that needs to unfold.
Increased
consumption in Asia - both consumer and industrial
- is vital to the global economy. This trend,
however, is in its infancy and in no way can Asia,
at present, be deemed a substitute for demand in
the US and Western Europe. Nor is it independent
of strong correlation with movements on Wall
Street. Yet the removal of the yuan-dollar peg is
one less obstacle in the structural movement now
headed in that direction.
This need not,
however, be something to fear. Major business and
investment opportunities are arising as Asia
develops. In comparison, growth in the US and
Western Europe will be relatively stagnant. Given
the leadership role US firms continue to
demonstrate in the development of intellectual
property and technological applications, as well
as products, content, branding, distribution and
financial management, there is no reason why they
cannot command a sizable share to bolster top-line
growth and profitability. This is true
irrespective of whether they control and undertake
the actual manufacturing.
It is also
important to recognize both the role that Asian
central banks have played in financing US
consumption, as well as the ramifications that
efforts to lift Asian demand will bring on their
appetite for US Treasury holdings. Nobel prize
winner Joseph Stiglitz highlighted what he termed
the "myth of mutual dependence" which underlies
this relationship in a recent Financial Times
column, asking, "if [an Asian country's]
government is to lend money, why not finance its
own development? Why not fund increased
consumption at home, rather than that of the
richest country in the world?" While a move away
from US treasury securities is not imminent, that
does not mean this will always be so.
The
yuan revaluation makes imports less expensive, not
only in China, but in other Asian economies now
more able to let their own currencies appreciate
as well. For the moment, the change is small.
However, even if China's primary motivation was to
alleviate political heat and no further steps are
envisioned, the genie is out of the bottle. Market
forces and diplomatic pressure are likely to force
additional movement. Just as every quarter point
rise by the Fed is largely insignificant by
itself, each builds in impact over time.
Forward-looking investors can use this
growth to diversify and energize portfolio returns
- supplementing their US and European businesses
and holdings. Simon Property Group, for example,
one of the largest US real estate and shopping
mall developers, announced last month a
partnership to develop about a dozen shopping
centers in China. Wal-Mart - which will have as
many as 60 outlets on the mainland by year's end -
will place an anchor in each center. Some will
include cinemas operated by a unit of Time Warner.
Financial investors - retail as well as
institutional - who recognize these developments
are beginning to benefit as well. Interestingly,
their focus is not on exporters, who have been the
most widely owned Asian equities by foreign
investors in the past, but on companies with a
domestic focus. In addition to commodity plays
such as BHP Billiton or Rio Tinto, and numerous
exchange-traded funds (ETFs) and mutual funds,
examples of US listings include ICICI Bank and
VSNL Telecom in India, iShares FTSE/Xinhua China
25 Index, Petrochina and China Telecom in China,
Telekom Indonesia in Indonesia, Kookmin Bank,
Hanaro Telecom and Korea Electric Power in South
Korea and NTT DoCoMo, Orix, Mitsubishi Tokyo
Financial Group and Nissin in Japan. Those willing
to look at bulletin board listings have even more
options. A few interesting candidates include
Bumrungrad Hospital, Noble Group and Jollibee
Foods.
It is entirely possible - or even
probable - that along the way China and other
Asian economies will falter in their efforts to
manage this transition. This will lead to
increased volatility, possibly the much-feared
"hard landing" in China, and numerous other
economic, financial, social and political
pressures that exert themselves in ugly fashion.
Similarly, the potential for financial crises in
the US should not be underestimated. The bottom
line, however, is irrespective of the potential
for traumatic volatility along the way, over time
Asia and other emerging economies - as well as
restructuring stories such as Japan - will rise in
importance when measured in terms of total demand
and market capitalization in comparison with the
US and Western Europe. The yuan revaluation marks
a perhaps small - but significant - step in this
evolution.
As Asia increasingly exerts
itself as an independent consumer and industrial
market, both portfolio and direct investors need
to incorporate this development into their
thinking. This will include close monitoring and
planning, as well as financial positions and
business ventures that can take advantage of the
opportunities now beginning to unfold.
Keith W Rabin serves as
president of KWR International, Inc (KWR) and
publisher of the KWR International Advisor
newsletter.
(Posted with permission
from KWR International, Inc,
(KWR), a consulting firm specializing in the
delivery of research, communications and advisory
services.) |
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