Wednesday, November 5, 2003
Asia needs to diversify growth drivers: Morgan Stanley
Reuters Singapore, November 5
Asia has not learnt the lesson of the 1997-98 financial crisis and because of that could face a difficult 2004 as the growth engine of Chinese import demand slowed, a leading economist said on Wednesday.
Morgan Stanley chief economist Stephen Roach said Asia had not diversified its sources of growth, merely substituting China for the foreign capital that fuelled its growth in the early to mid-1990s, and that left it exposed to sudden changes.
"I'm just struck about the fact that Asia, still groping for a solution to growth and development, continues to go from one extreme to the other," he told reporters at a Morgan Stanley conference in Singapore.
"The extreme in the early 90s was the heavy reliance on the capital inflows from the West, and now it is heavy reliance on demand from China."
"Asia needs balance, diversification, multiple sources of growth. I just don't see that evident today."
Despite encouraging growth signals around the world, Roach saw risks to the recovery because Asia was too reliant on the United States and China. He described a world economy out of balance:
"Two engines -- the American consumer on the demand side, the Chinese producer on the supply side -- both of which have been over-extended, both of which have grown too rapidly, both of which are now in the process of slowing."
Roach saw Chinese import growth slowing to about 20 percent next year from around 40 per cent in 2003 as US demand for Chinese goods slowed and Beijing took steps to head off an overheating of the domestic economy.
"And for Asian economies that are benefiting dramatically from Chinese imports, that benefit is going to be half the magnitude next year that it is next year," he said.
Morgan Stanley analysis showed in the 12 months ended August, 73 per cent of Japan's export growth was accounted for by increased exports to China. For Taiwan, the figure was 99 per cent, while it was around 40 in South Korea, 30 per cent in Malaysia and around 25 per cent in Singapore and Thailand. Compounding Asia's difficulties, Roach saw the US dollar declining about 10 per cent in broad trade-weighted terms in each of the next two years, with the risk that it would happen more quickly.
Exchange rate losses from a weaker US dollar and slowing US demand would pressure Asia's policy of stemming gains in regional currencies to keep exports competitive.
"The ability of Asia and other surplus-saving economies to keep funding the US current account deficit with their open ended buying of Treasuries is not sustainable," he said.
A weakening dollar meant Asia would need to be compensated for currency risk. That meant higher US interest rates, which in turn would cut into US consumer spending.
"I think the music is about to stop. I don't know exactly when," Roach said.
© Hindustan Times Ltd. 2003.