Asia needs to fully wake up to the scale of the West's economic crisis

Asia needs to fully wake up to the scale of the West's economic crisis
Asia is not going to rescue the world economy.

By Ambrose Evans-Pritchard Last Updated: 10:06AM GMT 04 Jan 2009
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The news from Japan, China, and the Pacific tigers has moved from awful to calamitous since the global industrial system snapped in October.
A raw reality is being laid bare. The mercantilist export model of the East is proving dangerously geared to the debt-driven excesses of the West. As we go down, they go down too. Some are going down even harder.
Japan's industrial output contracted by 16.2pc in November, year-on-year. "For an economy which lives from the prowess of its industrial exports, this is simply earthquake," said Edward Hugh from Japan Economy Watch.
Japanese exports fell 26.7pc. Real wages fell by 3.1pc, the seventh monthly fall. Taken together, the figures are worse than anything during Japan's "Lost Decade". They have a ring of 1931.
The fall-out in Japan has already shattered the authority of premier Taro Aso. His approval rating has dropped to 21pc. The cabinet is in revolt. The world's second biggest economy no longer has a functioning government.
Credit Suisse warns that Japan could slide into deflation of minus 2pc by the autumn. Since interest rates are already near zero, which means that real rates will rise as the slump deepens – the surest path to a liquidity trap.
Kyohei Morita from Barclays Capital estimates that Japan's GDP shrank at an annual rate of 12.2pc in the fourth quarter. "It's shocking," he says. Singapore has already reported. Fourth-quarter GDP contracted at an 12.5pc annual rate.
Taiwan's exports fell 28pc in November. Shipments to China dropped 45pc. Korea's exports dropped 18pc in November and 17pc in December.
"We are looking right in the face of an unprecedented regional depression," said Frank Veneroso, the investment guru.
"If there is one part of the global disaster that is not reflected in today's massacred markets it is this Asian debacle. The source of the collapse appears to be above all a contraction in China."
One has to careful with Chinese figures. When I covered Latin America in the 1980s, veteran analysts watched electricity use to gauge economic growth since they could not trust official data. It is striking that China's power output fell 7pc in November.
Asia has clearly failed to use the fat years to break its dependency on the West. It has stuck doggedly to its export strategy – by holding down currencies, or by subtle policy bias against consumption.
In China's case it has let the wage share of GDP drop from 52pc to 40pc since 1999, according to the World Bank.
The defenders of this dead-end strategy are now coming up with astonishing proposals to put off the day of reckoning. Akio Mikuni, head of Japan's credit agency Mikuni, has called for a "Marshall Plan" to bail out America by cancelling $980bn of US Treasury bonds held by the Japanese state.
This debt jubilee does have the merit of creative thinking, but it is entirely designed to keep the old game going. "US households won't have access to credit they have enjoyed in the past. Their demand for all products, including imports, will suffer unless something is done," he said.
Let me be clear. I make no moral judgment on the "neo-Confucian" model, nor – heaven forbid – do I defend the debt depravity of the West.
A stale debate simmers over whether the Great Bubble was caused by Anglo-Saxon and Club Med hedonism, or by an Asian "Savings Glut" spilling into global bond markets and fuelling asset booms, as Washington claims. It was obviously a mix.
Two cultural systems interacted through globalisation, locking each other into a funeral dance.
The point is that this experiment has now blown up. Whether or not we slam straight into a global depression depends on how we – East, West, all of us – handle this.
The top sources of net global demand as measured by current account deficits over the last 12 months have been the US ($697bn), Spain ($166bn), Italy ($71bn), France ($57bn) Australia ($57bn), Greece (53bn), Turkey ($47bn), and Britain ($46bn).
Most are tightening their belts drastically, and in the case of Britain the shift has been so swift that the arch-sinner may soon be in surplus. If they are draining world demand, then world demand is going to collapse unless others step into the breach.
The surplus states – China ($378bn), Germany ($266bn) Japan ($176bn) – have not yet done so, which is why the global economy went off a cliff in October, November, and December. Beijing is planning a $600bn fiscal blitz.
But how much of it is an unfunded wish-list sent to local party bosses? It will not kick in until the middle of the year, an eternity away.
For now, China is dabbling with protectionism to gain time – a risky move for the top surplus country. It has let the yuan fall to the bottom of its band. Vietnam has devalued. Thailand and Taiwan are buying dollars.
Watching uneasily, the Asian Development Bank has warned against moves to "depreciate domestic currencies".
Anger is mounting in the West. Alstom chief Philippe Mellier has called for a boycott of Chinese trains.
"The Chinese market is gradually shutting down to let the Chinese companies prosper. There's no reciprocity any more," he told the Financial Times. Optimists say the collapse in oil prices will give Asia a shot in the arm. Governments are still flush, with ample scope for fiscal rescues. Asia's central banks are sitting on $4.1 trillion of reserves.
They have the means, perhaps, but do they have the will to act in time? Or do Beijing, Tokyo, Taipei, Kuala Lumpur, – and indeed Berlin – still cling to their assumption that others will spend for them?

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4093676/Asia-needs-to-fully-wake-up-to-the-scale-of-the-Wests-economic-crisis.html


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Decoupling dies as half the globe hits crunch
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