Thursday, February 25, 2010

Nomura Sees The Ascent Of Asia

Let's start with the driving horse of the Asian miracle. Nomura's strategists and banking analysts wrote over the night:
We have quantified the reduction in liquidity by China to reduce speculation in real estate. BPOC bond issuance and increased RRR have reduced liquidity in the past 25 trading days by US$203bn — almost all of the build-up of excess liquidity in all of 2009. This aggressive slamming on of the brakes took us by surprise. Banks’ stock prices have followed changes in liquidity for several years. (It’s all about liquidity). We think much of the liquidity has been hoovered up. Property prices in major cities are down 5% and volumes are down by half.
Deutsche Bank Research has a nice note on the China's Provinces, and write in regard to the Western hope:
Pinning hopes on China to take the place of the US consumer is asking too much. While private consumption offers some catch-up potential especially in China‟s non-coastal provinces this will not be enough to offset the loss in demand from the US. Moreover, much of the additional demand for consumer goods will be served by local companies.
FT Alphaville sums-up the great Chinese tightening, but also respected economists, like Ken Rogoff and Simon Johnson, have expressed a dose of scepticism and criticism recently.

However, Nomura's global economics team has produced gigantic report "The Ascent of Asia". Here is the summary:

- Asia’s medium-term economic prospects look bright. The region has major, largely untapped, resources, suggesting that it has the supply-side capacity to maintain the strong growth of previous decades.
- The global crisis hit Asia hard, but its good macroeconomic fundamentals enabled it to take strong policy action that proved effective in boosting domestic demand,
- Asia thereby recovered quickly from the global crisis, and this accelerated the shift in economic and political power from the West to the East that has been taking place over the past 30 years.
- Asia’s economic resurgence has thus not come at the overall expense of the economies of the West, although some individual industries in the West are being challenged hard by competition from Asia.
- Realising Asia’s supply-side potential over the medium term will require that the recent strong growth of aggregate demand be maintained. For this, the structure of that demand has to be sustainable.
- Asia’s policymakers would be unwise to assume that, once the world economy recovers, they will be able to count on strong export-driven growth. Western opposition to penetration of its markets by Asia is growing.
- Asia should instead plan on taking part in a global rebalancing of demand: faster Asian domestic demand growth, and slower growth of exports to outside the region – with the converse in the West.
- Continental-sized economies have the requisite potential for growth to be driven by domestic demand. The US until the early 1960s, and India since independence in 1947, are two important historical examples.
- China has had strong export growth over the past 30 years, but domestic demand growth has been strong, too. History suggests that China’s future growth could be led, sustainably, by domestic demand.

- India’s growth has been led fundamentally by the growth of domestic demand, and this should continue for the foreseeable future.
- Smaller economies, by contrast, depend importantly on export growth: their home markets are individually too small to offer economies of scale, and the spill-over of domestic expenditure into imports too substantial.
- Collectively, however, Asia’s smaller economies add up to around 6% of world GDP. By linking themselves through trade they can emulate a medium-sized economy and so depend less on exports to the West.
- Japan continues to rely heavily on exports. However, with its real wages now high, it, too, is less able to depend on export growth. Spurring domestic demand through supply-side reforms has become urgent.
- China, and possibly India, will also need to achieve a rebalancing of the main components of domestic demand: away from investment towards consumption.
- Investment, a potentially volatile component of demand, accounts for a high proportion of total demand in these economies. Over time, it will probably need to come down to reduce the risk of economic instability.
- Asia’s economies, like their OECD partners before them, will experience a growing need to embark on a range of structural reforms, including labour, competition, financial market, social, and trade policies.
- A prerequisite to success with structural policies and trade policies, however, is resolution of the issue that has long been at the forefront of policy concern -exchange rate policy, particularly as regards the renminbi.
- Continual government intervention to prevent currency appreciation is not only causing trade frictions with the West; it is also creating internal problems, including a loss of control over monetary policy.
- To minimise instabilities caused by currency appreciation, China will have to proceed cautiously, in stages. As it does so, it will become easier for other Asian economies to accept appreciation of their currencies.
- Asia’s rapid growth has brought with it pollution problems that are becoming important nationally and, in the case of greenhouse gas emissions, globally.
- Addressing these environmental problems will inevitably impose a cost. But given that all economies globally will be facing similar costs, these should not reduce the competitiveness of Asia’s producers.
- Furthermore, world-wide, policy-induced increases in the (relative) price of carbon, and increasing pollution standards worldwide, offer huge potential opportunities to producers of green technologies.
- Asia’s policymakers face considerable challenges in implementing the policies that will ensure that their economic growth remains sustainable. But the potential rewards are huge: Asia has everything to play for.

Asia's share of world GDP should grow, according to the economists at Nomura. Click on charts to enlarge, courtesy of Nomura.

Macroeconomic growth does not equal to returns to capital.


  1. Where can I obtain the whole report?


  2. Financial Times at their FT Alphaville blog posted it in the "Long Room" today ... available to FT subscribers.

    Otherwise send me an email.

  3. The email option was not a wholesale intention and is closed now. Sorry!