Why China must lead the recovery
May 6 2009 By Andrew Miller, The Journal
ALTHOUGH the media remains focused on economic policy developments in the United States, Japan and Europe, we believe that South and East Asia (excluding Japan), led by China, should lead the global economy into any potential recovery.
By some key measures, China has shown a remarkable initial bounce in economic indicators. There have also seen signs that Chinese growth has begun to spill over into the rest of non-Japanese Asia through the export channel, as shown by the relative stabilisation of export growth numbers across the region.
While much of the current bounce is being led by government spending and increased lending, we believe this will eventually result in a more sustained recovery and a positive reaction in regional equity markets.
When looking at the data, it is not hard to understand why Asian markets have taken on a more positive note over the past few weeks. Chinese economic data in particular clearly point to a fiscal stimulus that is having its full effect. For example, China’s official Purchasing Managers’ Index rose above 50 in March (the mark separating expansion from contraction) from a low of just 38.8 in November 2008. Meanwhile, consumer confidence appears to be showing signs of bottoming out.
This ‘recovery’ is most likely led by the Chinese government’s fiscal stimulus in the form of increased bank lending. The latter jumped by 29.8% in March. What is important to note, however, is that this seems to have had some positive ‘spill over’ effects on the rest of Asia ex-Japan via the export channel and the freefall in exports from countries like South Korea appears to have been arrested.
Looking forward, the growth of domestic consumer spending (as a percentage of GDP) is likely to be a key theme, especially in China where the ratio of consumption spending to GDP remains low (just over 36% in 2008). While the need for China to shift its impetus for economic development away from exports toward domestic demand has been discussed for many years, the fact that the US savings rate may permanently shift upwards may lead to a reduction in export demand at the margin. This, in turn, is likely to be a catalyst in speeding up China’s transition to a focus on domestic-driven growth.
It is also crucial that most Asian markets continue to look attractively valued. Current price-to-earnings valuations are well below long-term averages and also compare favourably to the levels reached during the Asian Crisis of 1997-98 and the previous downturn of 1999-2001.
Andrew Miller is regional head of Barclays Wealth
