Is This Really Asia’s Century?

By Ichiro Suzuki

The 21st century belongs to Asia! This appears to be a consensus around the world, especially widely held in the investment community since the turn of the century. Asia contributes to the vast majority of global economic growth, housing factories for the world. The region is a home to a significant pool of savings and foreign exchange reserves, which make them top holders of U.S. Treasury securities. Too often, however, a consensus fail to materialize. A generation or two ago, it was believed that Japan would dominate the 21st century, and the country has lost a mojo completely, upon the burst of its infamous bubble at the outset of the 1990s. A story like Japan’s can develop elsewhere easily. Is Asia excluding Japan capable of following a different path?

Yes, Asia still leads the world in growth rates. But anyone who thinks the region’s growth rate is double digits, he or she has to readjust his/her mindset to the new decade. The coronavirus-ravaged 2020 could present an exceptionally low numbers that can be considered one-off. Without it, growth in Asia, most notably that of China, has already been trending down throughout the 2010s. Without the virus, China would have grown the north of 5% this year, with the rest of the region lower than China. India’s growth has been suffering materially from Narrenda Modi’s mismanagement of the economy and a mounting bad debt in the banking system. Worse, even if it’s one-off, India appears to be suffering a heavier toll through lockdown than elsewhere. Asia still grows faster than the rest of the world. However, growth rate deceleration in the region is more distinct than the rest of the world, and this matters. In the 2010s following the global financial crisis (GFC) global trade has already grew at a slower rate than economic growth. Trade is suffering even more acutely at the outset of the 2020s, due to realignment of global supply chains and it could be made worse by a possible rise in protectionism. This makes life challenging for Asia that has thrived on trades. When a wildly popular growth company reaches the limit of Its growth rates, its share price often begins to suffer even if the company is still growing relatively fast. When a hype is over, expectation needs to be readjusted, and the hype factor needs be taken out. 

The aging of the population is in progress In many parts of the world. It is taking place even in Latin America. East Asia is ahead of the world in this global mega-trend. While Japan has been too well known as the leader in the trend, others are not too far behind. In South Korea, women on average give births to 0.93 babies, lower than anywhere. China’s one child policy has exerted pressure on demography. Though the policy was lifted a few years ago, young Chinese families in cities are no longer interested in having more than one child, or they don’t afford a second baby. Raising kids in cities is an expensive endeavor. China’s working age population already peaked out several years ago and its population is likely to start declining by the end of this decade. Elsewhere in the region, especially among the Tigers that took off in the late 20th century, the outlook of demography is not too exciting, either. The trend of aging population will hit India much later than East Asia, probably in the latter half of this century. Social security and healthcare costs are weighing heavily on Japan’s public finances. This problem is coming to the rest of East Asia and the region in general is not ready.

At the National People’s Congress near the end of May, China’s premier Li Keqiang was confident about the country’s ability to lift its economy through fiscal policies. While Beijing is certainly capable of doing this, the majority of projects that can energize economic performances through enhanced efficiency are already done. Projects from this point on are likely to be less productive. In the worst case, China might end up with building many bridges to nowhere. In fact this is what Japan went through for a generation following the bubble’s burst 30 years ago, at a time when social security and healthcare costs began to balloon. Beijing has intensely studied the process that Japan fell into what turned out to be a lost two decades, so that it does not follow Japan’s footsteps. Nonetheless, China might still fall into the same trap, because the alternative to debt-financed infrastructure projects is simply watching the economy slowing that no politicians afford to do.

While many countries are not in a position to issue debt to finance infrastructure projects, China certainly is fully able to do it. Nonetheless, borrowing from this point on accelerates debt accumulation that has been already under way since the last decade. While Beijing’s debt burden is still healthy at approximately 50% of GDP, local governments reportedly are burdened with a vast amount of their own debt that includes highly opaque special investment vehicles (SIV). In addition, China’s corporate and household sectors have already leveraged up their balance sheets considerably. Do these two sectors continue to build up debt? In the 1990s, Japan’s corporate and household sectors went on to a phase of fierce deleveraging, shedding the debt they accumulated in the booming 1980s, in response to the Bank of Japan’s draconian monetary policy. While Japanese private sectors deleveraged, the public sector stepped in to make up for the lost demand. What does China do? At the very least, the People’s Bank of China (PBOC) is far from being on a path to higher interest rates, and is injecting liquidity into the system responding to the coronavirus shock. The PBOC‘s action prevents the economy from contracting, but the economy is kept on an unhealthy path of ever-growing debt burden that could one day become unsustainable.

Asia acutely felt a pain caused by a lack of demand in the 2008-09 GFC. American consumers’ tightened purses hit hard all the export-dependent regions. It hit Europe badly, too. The entire world was at the mercy of profligacy of the American households that many scorn. Escaping this trap and reorienting the economy to the less export-dependent direction is a great deal easier said than done. Japan has been trying to do it since the early 1980s, with little results. In China, household consumption has been systematically surpressed in order to promote infrastructure and business investments, though Chinese tourists’ shopping spree overseas might create different impressions about them. It is even more difficult to create a structural shift in the economy amid surging joblessness and pay cuts brought by the coronavirus recession.

It is hard to project glittering Asia for the remainder of the 21st century in a way that was once advertised. A number of things have changed and eroded promises of the past. Most likely the region performs in line with the rest of the world. 

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.