Business

Asian economies face regional and global challenges

  • 1 January 2013
  • From the section Business
A worker at a factory in China
Image caption There has been a pick up in China's manufacturing and export sectors

On the face of it, Asian economies are entering the new year on a positive note.

There are signs that growth in China, the region's biggest and the world's second-biggest economy, may be rebounding.

The Japanese economy has received a much-needed shot in the arm with the new prime minister promising measures to spur growth.

For its part, India has approved foreign direct investment in sectors such as multi-brand retail and airlines, which many hope will help revive its economy.

However, dig a little deeper and the true picture begins to emerge.

The region is still facing the same global issues, such as the eurozone crisis, that impacted its growth in the past year.

To make matters complicated, many of the Asian economies will have to deal with domestic and regional issues in the coming months which may have further bearing on their growth.

Chinese direction

One of those issues is the direction that the Chinese economy may take in the near term.

Over the past decades, China has relied heavily on exports and a government-led investment boom to boost its growth.

Many analysts have warned that the model is unsustainable and have called upon Beijing to boost its domestic consumption and rebalance its economy.

For his part, the new Communist Party leader Xi Jinping has pledged to deepen economic reforms and further open up China's economy.

However, there are concerns that a shift in its growth model may hurt China's growth in the short term.

"They must embrace real economic adjustment, which will bring real pain and likely translate to slower growth, at least for a time," said Patrick Chovanec of the Tsinghua University in Beijing.

Analysts and observers fear that China may not be able to bear the short-term slowdown and may turn back to the traditional model of growth.

Those fears have been fanned further after Beijing approved infrastructure projects worth more than $150bn (£94bn) as its growth pace fell to a three-year low in the July to September quarter.

"In recent months, China's economy has seen a 'rebound' engineered by looser lending and a renewed surge in investment," says Mr Chovanec.

"Markets have cheered, but others worry that China's new leaders may be shying away from the tough choices that must be made to get China's economy back on track."

Demand for commodities

Whatever direction China decides to take, will have a direct impact on resource-rich countries such as Australia and Indonesia.

If China does work towards rebalancing its economy, and if its growth slows as a result of that - as many economist expect to - it may hurt demand for resources.

"A further slowdown in China would affect commodity exporters in the region particularly strongly, since, with the exception of Timor-Leste, China is their major trade-partner in commodities," the World Bank said in its latest report on the region.

The bank warned that such a slowdown may also decrease private investment and government spending in natural resource sectors, further hurting the economies of these countries.

A drop in demand from China, one of the world's biggest importer of commodities, is also likely to have an negative impact on commodity prices.

The World Bank said that "households and businesses in regions highly dependent on commodities for livelihoods and income could feel significant localized impacts" due to softening commodity prices.

On the contrary, if China decides to continue with its traditional investment-led growth model, it may see a fresh wave of infrastructure spending and boost demand and prices of natural resources.

That in turn would help boost growth in these resource-rich countries in the region.

Currency movements

The valuation of currencies was a hot topic in 2012 and developments over the past few weeks suggest that it is likely to remain in the headlines for some time.

This is not least because of the drastic dip in the Japanese currency.

The yen has fallen almost 9% against the US dollar since 15 November amid hopes of additional stimulus from the newly elected government.

Japan's new Prime Minister Shinzo Abe has promised to take measures to weaken the yen to help revive the country's struggling economy.

A weak yen bodes well for the Japanese exporters as it makes their goods less expensive to foreign buyers and boosts their profits when they repatriate their foreign earnings back home.

While that is good news for Japan and its businesses, it is not so for its neighbours, especially South Korea.

South Korea's manufacturers compete directly with Japanese firms in various markets and sectors across the globe.

While the dip in the yen has made Japanese goods more affordable, the South Korean won has been rising - making goods manufactured in the country more expensive.

The South Korean currency has risen nearly 10% against the US dollar since June 2012.

With exports accounting for more than half of South Korea's overall economy, it is highly likely that a further drop in the yen, or a rise in won, or a combination of both may prompt Korean authorities to intervene.

"The impact on South Korea will be significant," said Nick Verdi, a foreign exchange strategist for Asia Pacific with Barclays. "They have been keen to slow the appreciation on the won."

Significant movement in the yen and won may also prompt China, which has been accused by the US of keeping its currency artificially low to help its exporters, of keeping the value of its currency in check.

"We could see a bit more weakening of the yuan against the dollar in the coming weeks," said Mr Verdi.

The yuan is allowed to trade against the US dollar within a 1.0% band on either side of a daily rate set by China's central bank..

Western impact

Keeping their exports affordable to foreign buyers has gained even more importance for Asian countries in wake of declining demand from key markets such as the US and eurozone.

The economic recovery in the US continues to remain fragile and consumer demand in the world's biggest economy has not picked as fast as some had hoped.

Meanwhile, the debt crisis in the eurozone has hurt consumer sentiment in the region and dented demand.

To make matters worse, the crisis has spread to the region's bigger economies over the past year.

As a result, all leading Asian economies have seen their sales to the eurozone dip in recent months.

There are fears that if the crisis were to escalate further it may hurt in Asia's export-dependent economies.

"This could result in further sharp declines in Asian exports to the region," said Rajiv Biswas, chief economist Asia-Pacific at IHS Global Insight told the BBC.

"An escalation of the eurozone crisis would also trigger financial markets instability and risk aversion that would result in global investors pulling capital out of emerging Asian equities, bonds and currencies."

If that were to happen, the optimism at the start of new year may give way to pessimism very quickly.

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