The Myth of Asia Remaining the Strong Part of the World Economy

Many predicted that Asia would remain the strong part of the world economy. It is true that some Asian export countries including China have enjoyed the U.S. stimulus inspired demand. Yet, is China really the new rising sun and would the general public in the Asian economies prosper in the midst of a global economic slowdown?

As I have pointed out, some of the data points like the HSBC PMI have suggested a caution over Asian exports. Some Asian countries are experiencing monetary inflation and asset bubbles. Hot money inflows have caused (will cause) many repercussions. They could create great harm.

Some Asian countries may have to deal with the consequences of a bubble burst and capacity overhang, although some seem to take steps to avoid the preconditions of a bubble economy.

China seems to be not playing ball with the Western financial engineers, but will they be able to fend off its dwindling exports and bubbles?

As I recently pointed out, some Asian economies would likely to join the QE crowd. They have engaged in their particular version of extend and pretend. One has to wonder whether they are committing the same mistakes as the Western economies like misallocation of resources.

For some countries both in the East and West, structural defects have added rather than removed as they have undergone the bubble burst and financial crisis. For one example, the debt levels in countries like the U.S. and Japan have increased. In the U.S., Japan and Korea, their manufacturing base has been lost with their operations shipped to China. Their middle class has been shrinking and income inequality is widening.

After all, the U.S. carries the world’s largest sovereign debt. Their QE policy won’t revive their real economy. Their consumption likely won’t be coming back. The U.S. has been the prime export market for many Asian export economies. Hence, dwindling U.S. consumption would definitely hurt their economies.

Despite a real estate bubble and other potential problems, China is the biggest creditor of the entire world. Although the middle class base in China may be expanding over the years, there is a tiny fraction of people reaping the benefits of their new economy. Will China ultimately take the place of the U.S.?

Much would depend on another round of the U.S. QE and the Chinese economy. Some Asian countries including Japan and Korea seem to have realized that they have no choice but to come to terms with China.

As much as the American political economy would be the determining factor in unfolding economic/political events, the Asian countries’ political economy would matter much.

How will the dynamics of globalized economics unfold? In the worst case, how would the Asian countries cope with a flood of U.S. sovereign insolvency when it happens?

How China Is Building Its Technology/Innovation Capacity

While some like Jim Chanos contend that exports are only 5 percent of China’s GDP, China is aggressively building its manufacturing base and technology/innovation capacity, which will serve as the platform for further prosperity.

The following article discusses an example of how China is accumulating its technology competence.

From the New York Times:

Judging by the din at its factory here one recent day, the Spanish company Gamesa may seem to be a thriving player in the Chinese wind energy industry it helped create.

But Gamesa has learned the hard way, as other foreign manufacturers have, that competing for China’s lucrative business means playing by strict house rules that are often stacked in Beijing’s favor.

Nearly all the components that Gamesa assembles into million-dollar turbines here, for example, are made by local suppliers — companies Gamesa trained to meet onerous local content requirements. And these same suppliers undermine Gamesa by selling parts to its Chinese competitors — wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.

But in the five years since, the upstarts have grabbed more than 85 percent of the wind turbine market, aided by low-interest loans and cheap land from the government, as well as preferential contracts from the state-owned power companies that are the main buyers of the equipment. Gamesa’s market share now is only 3 percent.

With their government-bestowed blessings, Chinese companies have flourished and now control almost half of the $45 billion global market for wind turbines. The biggest of those players are now taking aim at foreign markets, particularly the United States, where General Electric has long been the leader.

The story of Gamesa in China follows an industrial arc traced in other businesses, like desktop computers and solar panels. Chinese companies acquire the latest Western technology by various means and then take advantage of government policies to become the world’s dominant, low-cost suppliers.

It is a pattern that many economists say could be repeated in other fields, like high-speed trains and nuclear reactors, unless China changes the way it plays the technology development game — or is forced to by its global trading partners.

http://www.nytimes.com/2010/12/15/business/global/15chinawind.html

KOSPI Reclaims 2,000-level Largely Due To Foreign Buying

Bubbles everywhere. Again, the U.S. easy monetary policy prevails.

From Yonhap News:

South Korea's key stock index again reached the 2,000-point milestone on strong foreign buying on Tuesday, prompting analysts to predict it will advance further and hit an all-time high in the coming year.

The benchmark Korea Composite Stock Price Index (KOSPI) advanced 12.46 points to finish at 2,009.05, rising 0.62 percent from the previous session and closing above the 2,000 mark for the first time since late 2007.

The market turnaround came after the KOSPI peaked at an all-time high of 2,064.85 on Oct. 31, 2007 only to fall back below the 1,000 point the next year as the global financial crisis, triggered by the collapse of Lehman Brothers, wreaked havoc on the world and local financial markets.

The recent market rally is widely attributed to continued stock buying by foreign investors who are betting on emerging economies that have pulled out of the global crisis at a faster pace than their advanced peers.

Overseas investors have bought a net 19.4 trillion won (US$17 billion) of KOSPI shares so far this year with institutional and retail investors selling a net 10.5 trillion won and 5.3 trillion won each, according to the bourse operator Korea Exchange.

Analysts said the local currency's uptrend has helped boost the allure of local stocks for foreigners since the value of won-denominated share holdings climbs as the Korean currency ascends against the U.S. dollar and other major global currencies.

http://english.yonhapnews.co.kr/business/2010/12/14/81/0503000000AEN20101214003700320F.HTML

Is Apple a Social Reflection of the Final Days of Rome?

One of the themes I’ve been writing in this blog is the purpose of innovation/technology. Moreover, I’ve posited that innovation endeavor is intertwined with economic and social development, making the balanced policy undertaking more crucial.

The following article rhymes the themes of my blog to a certain degree.

From Sovereign Man:

It didn’t seem to matter much. Romans were convinced that the gods favored them, and that it was their natural place in the global pecking order to be the world’s dominant superpower.

The games continued, and Romans were too preoccupied watching gladiators and chariot races to notice that, like boiling frogs, they were being slowly heated by their imperial leadership.

I was thinking about this history recently while browsing some financial headlines like “Apple stock heading to $500″ and “This will be Apple’s Decade” and “Steve Jobs- Messiah.”

Apple is certainly an innovative company, and Steve Jobs is a media and technology visionary… but since dropping the “Computer” from its name in 2007, Apple Inc.’s primary focus is designing devices that facilitate the consumption of mindless and distracting media drivel.

Sure, iPhones and iPads are nice things, but with so many analysts expecting the stock to keep soaring, what does it say about our society that this may soon become the most valuable company in the world?

Don’t get me wrong, I’m not opposed to the company or any of the consumer devices that it develops… it just seems to me that, given all the problems in the world, there are more pressing matters than camping out for 3-days to get the latest iPad release.

Like the Romans, our currencies are being debased and our governments are bankrupt. Economies are stalling, North Korea is saber-rattling again, worldwide governments are stamping out privacy and transparency, and a global food and water crisis is looming.

And, like the Romans, most people seem too preoccupied to either care much or make the necessary preparations to ride out the storm.

Technology is really a wonderful thing; I think that it will be newly developed technologies that ultimately pull humanity out of the mess that we’ve created for ourselves.

We live in rather interesting times, though; the technology sector’s engineering brilliance goes where demand and financial incentives are the greatest… and for now, that seems to be designing devices that can mimic flatulence or geolocate the nearest pizzeria.

This will change eventually as the problems worsen and society’s priorities shift… but for now, I think that Apple’s soaring profits and society’s evangelical devotion to its products may be a social reflection of the final days of Rome.

http://www.sovereignman.com/expat/a-clear-indication-of-the-decline/

HSBC: A Complex Picture of China

Will China become the world’s growth engine?

One may want take this report with a few grains of salt.

From Zero Hedge:

What are the report's implications in a nutshell:

What does it mean for China’s future when local officials have widespread powers over land sales, infrastructure, commercial and residential property construction, natural resource exploration and foreign direct investment?

First, sizzling growth should continue for at least another five years. Local governments have managed to beat Beijing’s growth targets by a few percentage points every year since 1980. Published data for the coming 12th Five-Year Plan from 2011 to 2015 show most provinces remain ambitious in their targets.

Second, these growth ambitions have increased inter-regional competition. Provinces have far more ambitious plans for the expansion of their rail networks and clean energy activities than those stipulated by national targets. In some cases, the local target is double the national one. One reason for this is that to get promoted in China, you have to outperform your peers.

The danger, however, is that over-investment leads to overcapacity. For example, Kunshan’s strong position in IT is being challenged by the municipality of Chongqing. Together they could soon supply 80 per cent of the world’s notebook PCs – raising concentration risks as well as oversupply concerns.

Third, overcapacity may lead to bad credits. For example, a recent report submitted by the China Academy of Science to the State Council raised concerns about unsustainable debt levels and the risk of loss-making activities. It noted that the 1,000km Wuhan to Guangzhou bullet train, which started operating earlier this year, was running at less than half its capacity and would never make enough money to pay off the loans used to finance it.

Fourth, policies at the centre risk being less effective if they are quietly resisted by local authorities. Beijing launched its fierce crackdown on property speculation in April – and yet eight months on, not only have prices barely moved downwards, volumes actually rose again in September and October. Not a single city has rolled out the much expected property tax. Vested interests have also blunted Beijing’s repeated calls for consolidation in the country’s iron and steel industry.

http://www.zerohedge.com/article/definitive-guide-china-must-read

Where Is Korea Going?

There have been signs of dwindling exports, and Korean electronics companies have reined in production levels of certain products like TFT-LCD.

Meanwhile, many manufacturing jobs have been sent to China. For instance, the leading Korean electronics companies are becoming more like the U.S. platform companies, offshoring manufacturing jobs.

Korea is pressed to open up its service markets to U.S. firms.

We have seen how global forces can dismantle the once robust manufacturing-based country.

Korea’s national debt is mounting.

Korea’s middle class base is shrinking; income disparity growing.

There have been serious military conflicts.

Korea hasn’t come up with future growth platforms.

Again, policy and leadership matter.

Policy choice should be closely aligned with the nature of the society it wishes to encourage.

The greed is good attitude shouldn’t prevail at every level of the Korean society.

Korea’s National Debt Interest Payments Up About 15%

From Yonhap News:

South Korea is expected to pay around 23 trillion won (US$20.2 billion) in interest on its debt next year amid increased borrowing by the government to tide over the global economic crisis, data showed Monday.

According to the data provided by the finance ministry and other sources, interest payment on the nation's debt will amount to 22.9 trillion won next year, up about 15 percent from this year's estimated 20 trillion won.

http://english.yonhapnews.co.kr/news/2010/12/06/0200000000AEN20101206000900320.HTML

Is Korea Following the U.S. Path?

I sincerely hope that this deal wouldn’t trigger Korea to follow the U.S. path, substituting the financial sector for the manufacturing sector.

From Wikipedia:

U.S. financial services firms such as Citigroup have pushed for the Korea FTA. Citigroup’s Laura Lane, corporate co-chair of the U.S.-Korea FTA Business Coalition, stated that “it is the best financial services chapter negotiated in a free trade agreement to date”

http://en.wikipedia.org/wiki/South_Korea_%E2%80%93_United_States_Free_Trade_Agreement

From CBC News:

The deal would also open up South Korea's vast $560 billion US services markets to U.S. companies.

http://www.cbc.ca/world/story/2010/12/04/us-south-korea-trade.html

Mixed Reactions from Korea’s Political Parties on Korea’s New FTA Deal with the U.S.

From Yonhap News:

South Korea's political parties offered mixed reactions to the country's compromise on a trade deal with the United States, with the opposition calling it "humiliating" and vowing to launch a public campaign against it.

The two nations announced a supplementary agreement to change automobile provisions in the free-trade deal signed more than three years ago, removing differences that have blocked parliamentary ratification of the accord in both countries.

The ruling Grand National Party (GNP) welcomed it as a "win-win" for both countries and thus the South's parliament should ratify it as early as possible.

The main opposition Democratic Party, however, said it will never accept the "humiliating" deal.

"We can never pardon the negotiations since the government made too many concessions in a field connected to people's lives and safety," said Park Jie-won, floor leader of the party. "We'll refuse to give parliamentary ratification and launch a national campaign against the deal."

He said his country was hit by North Korea with shells and by the U.S. with the economy, referring to the North's Nov. 23 artillery attack on Yeonpyeong Island near the tense western sea border.

http://english.yonhapnews.co.kr/national/2010/12/05/73/0301000000AEN20101205002100315F.HTML

“Fear not, nor be afraid of them, for you walk with the Lord, and he will neither fail nor forsake you.” Deut 31:6

Banks Flooded Fed with Junk

From The Financial Times:

Banks flooded the Federal Reserve with billions of dollars in “junk bonds” and other low-grade collateral in exchange for much-needed liquidity during the crisis, as the financial sector struggled under a crippling credit crunch, new data show.

More than 36 percent of the cumulative collateral pledged to the US central bank in return for overnight funding under the Primary Dealer Credit Facility was equities or bonds ranked below investment grade. A further 17 percent was unrated credit or loans, according to a Financial Times analysis of Fed data released this week.

Only 1 percent of the collateral was Treasury bonds, which are normally used in transactions between banks and the monetary authorities."

http://www.cnbc.com/id/40488014

Foreign Banks Were Huge Beneficiaries of Fed Aid

From the Financial Times:

Foreign banks were among the biggest beneficiaries of the $3,300bn in emergency credit provided by the Federal Reserve during the crisis, according to new data on the extraordinary efforts of the US authorities to save the global financial system.

The revelation of the scale of overseas lenders’ borrowing underlines the global nature of the turmoil and the crucial role of the Fed as the lender of last resort for the world’s banking sector.

However, news that banks such as Barclays of the UK, Switzerland’s UBS and Dexia of Belgium borrowed billions of dollars at favourable terms from US authorities may further anger critics already enraged about the Fed’s rescue of Wall Street.

http://www.ft.com/cms/s/0/4dd95e42-fd6d-11df-a049-00144feab49a.html#axzz16xce3oSW

Worldwide Economic Slowdown and Pitfalls of Beggar Thy Neighbor Policy

The Asian countries have pursued a weak currency to artificially boost exports.

Now that the U.S. is devaluing the USD, they may have to go weaker with their own currencies to adjust to the weak US dollar.

As expected, most of Asian economies don’t seem to decouple from a worldwide economic slowdown.

Does Korea have domestic demand to fall back on?

How would Korea deal with any consequences stemming from its currency adjustment in the coming years?