China holds key to new value system but it's buying time
It's worth waiting since a stronger renminbi would also get others across asia to re-examine monetary policy
* By Gerard Lyons, Special to Gulf News
* Published: 00:00 March 30, 2010
* Gulf News
Anyone who has travelled across the globe in the first few months of this year will surely have been struck by one thing how different the mood is in Asia compared with that in the West. Although there is justified concern everywhere about what is happening to the US and European economies, the mood across Asia is more upbeat.
Currently there are two big offsetting forces playing out in the world economy. The positive and it is a big plus is the growing economic might of the emerging economies, led by China and India. Against this is a big negative: the debt overhang in the West. This is an immediate issue. Getting balance sheets back on track can be a long and painful economic process. This points to considerable downside risks for Western economies.
However, we should not ignore the lesson from one of the pre-crisis debates. Three years ago there was much talk that Asia was decoupled.
Asia was not immune to the global recession, but it had plenty of policy tools to cope with and minimise the downside risks. Some countries coped better than others, but overall the region did better than was initially feared. The same lesson is valid now. Recovery is here. But the pace of the rebound will be heavily influenced not just by what happens across Asia, but also by the outlook in the West. Thus the policy stance in each country will have a clear bearing on how it will cope, both in terms of sustaining the recovery and positioning for longer-term growth.
Developing world's challenge
With a sluggish recovery in the West, emerging economies will need to drive more of their own growth. Clearly this is happening in India and China, to name but two economies, and that is encouraging. In our view, emerging economies will outperform but this will not be uniform. The recovery in world trade will naturally help, but a key will be the extent to which domestically driven growth recovers. The need to differentiate across emerging-market regions remains paramount.
Across Africa, the most encouraging aspect is that recovery has been quicker than in previous post-recession scenarios. For the Middle East, it is important not to miss the growth and infrastructure boom unfolding across the region. Across Asia, whilst our previous distinction between export-driven and domestically driven economies is still valid, it needs to be supplemented by the current local drivers.
The fundamentals, the policy response and confidence will drive this recovery onwards. Confidence is hard to call, but has improved considerably in many emerging economies. On the policy front there is a need to differentiate between the near- and the longer-term factors. In the near term, some of the liquidity pumped into the system over the last year needs to be withdrawn. This is analogous to the normalisation of policy that has been talked about in the US. It is about trying to return monetary conditions to normal but in as timely a way as possible without disrupting the recovery. It is distinct from tightening of policy, which entails raising policy rates.
Meanwhile, in Asia, Malaysia has recently raised policy rates. Others will follow, but in a gradual way. Although there are valid concerns about rising asset prices, and worries about higher food prices, the overall inflation picture is still relatively subdued across Asia. This is explained by intense competition, surplus production capacity in many economies, and by people still looking for value for money when they spend.
However, monetary and fiscal policies also need to have an eye on the longer-term outlook. In this context, some of the underlying messages from recent annual budgets across the region have been relatively encouraging.
Balancing act
Whether it was in India, China, Hong Kong or Singapore, to name four, the focus is clearly on sustaining the recovery, positioning for future growth and moving up the value curve. Witness Korea's focus on fusion energy, Singapore's plans to boost long-term productivity and to come up with a paradigm-changing technology such as the telephone or the computer, and India's spending on infrastructure. This is vital, not only for domestic job generation but also if Asia is to play its role in helping rebalance the world economy.
How will exchange rate policy fit into this? Across Asia, all eyes are on China. The Chinese, it seems, are reluctant to see any significant appreciation in the value of the renminbi and continue to intervene in the currency markets. Foreign exchange reserves rise as a result. For the US, enough is enough. This April there is a strong possibility that the US will cite China as a currency manipulator in the annual report to the Congress. If so, it will not only intensify the debate over China using the currency level as a subsidy to its exporters, but it will also turn up the heat over protectionist issues and force the Congress to engage with China to resolve the impasse.
Although a stronger currency would appear to support domestic monetary policy goals in China, this does not guarantee that an appreciation will be imminent. The poor state of Western economies, including Europe, makes the Chinese nervous about a stronger currency. With a fragile world economy and a complex domestic environment, gradualism must dictate the pace at which they move. Eventually, however, something will have to give and the renminbi will appreciate. As China moves, expect the rest of Asia to follow.
Dr Gerard Lyons is Chief Economist at Standard Chartered Bank.
It's worth waiting since a stronger renminbi would also get others across asia to re-examine monetary policy
* By Gerard Lyons, Special to Gulf News
* Published: 00:00 March 30, 2010
* Gulf News
Anyone who has travelled across the globe in the first few months of this year will surely have been struck by one thing how different the mood is in Asia compared with that in the West. Although there is justified concern everywhere about what is happening to the US and European economies, the mood across Asia is more upbeat.
Currently there are two big offsetting forces playing out in the world economy. The positive and it is a big plus is the growing economic might of the emerging economies, led by China and India. Against this is a big negative: the debt overhang in the West. This is an immediate issue. Getting balance sheets back on track can be a long and painful economic process. This points to considerable downside risks for Western economies.
However, we should not ignore the lesson from one of the pre-crisis debates. Three years ago there was much talk that Asia was decoupled.
Asia was not immune to the global recession, but it had plenty of policy tools to cope with and minimise the downside risks. Some countries coped better than others, but overall the region did better than was initially feared. The same lesson is valid now. Recovery is here. But the pace of the rebound will be heavily influenced not just by what happens across Asia, but also by the outlook in the West. Thus the policy stance in each country will have a clear bearing on how it will cope, both in terms of sustaining the recovery and positioning for longer-term growth.
Developing world's challenge
With a sluggish recovery in the West, emerging economies will need to drive more of their own growth. Clearly this is happening in India and China, to name but two economies, and that is encouraging. In our view, emerging economies will outperform but this will not be uniform. The recovery in world trade will naturally help, but a key will be the extent to which domestically driven growth recovers. The need to differentiate across emerging-market regions remains paramount.
Across Africa, the most encouraging aspect is that recovery has been quicker than in previous post-recession scenarios. For the Middle East, it is important not to miss the growth and infrastructure boom unfolding across the region. Across Asia, whilst our previous distinction between export-driven and domestically driven economies is still valid, it needs to be supplemented by the current local drivers.
The fundamentals, the policy response and confidence will drive this recovery onwards. Confidence is hard to call, but has improved considerably in many emerging economies. On the policy front there is a need to differentiate between the near- and the longer-term factors. In the near term, some of the liquidity pumped into the system over the last year needs to be withdrawn. This is analogous to the normalisation of policy that has been talked about in the US. It is about trying to return monetary conditions to normal but in as timely a way as possible without disrupting the recovery. It is distinct from tightening of policy, which entails raising policy rates.
Meanwhile, in Asia, Malaysia has recently raised policy rates. Others will follow, but in a gradual way. Although there are valid concerns about rising asset prices, and worries about higher food prices, the overall inflation picture is still relatively subdued across Asia. This is explained by intense competition, surplus production capacity in many economies, and by people still looking for value for money when they spend.
However, monetary and fiscal policies also need to have an eye on the longer-term outlook. In this context, some of the underlying messages from recent annual budgets across the region have been relatively encouraging.
Balancing act
Whether it was in India, China, Hong Kong or Singapore, to name four, the focus is clearly on sustaining the recovery, positioning for future growth and moving up the value curve. Witness Korea's focus on fusion energy, Singapore's plans to boost long-term productivity and to come up with a paradigm-changing technology such as the telephone or the computer, and India's spending on infrastructure. This is vital, not only for domestic job generation but also if Asia is to play its role in helping rebalance the world economy.
How will exchange rate policy fit into this? Across Asia, all eyes are on China. The Chinese, it seems, are reluctant to see any significant appreciation in the value of the renminbi and continue to intervene in the currency markets. Foreign exchange reserves rise as a result. For the US, enough is enough. This April there is a strong possibility that the US will cite China as a currency manipulator in the annual report to the Congress. If so, it will not only intensify the debate over China using the currency level as a subsidy to its exporters, but it will also turn up the heat over protectionist issues and force the Congress to engage with China to resolve the impasse.
Although a stronger currency would appear to support domestic monetary policy goals in China, this does not guarantee that an appreciation will be imminent. The poor state of Western economies, including Europe, makes the Chinese nervous about a stronger currency. With a fragile world economy and a complex domestic environment, gradualism must dictate the pace at which they move. Eventually, however, something will have to give and the renminbi will appreciate. As China moves, expect the rest of Asia to follow.
Dr Gerard Lyons is Chief Economist at Standard Chartered Bank.